The euro has formed an easily detectable inverted head-and-shoulders pattern after its August 9–10 rapid drop against the US dollar. The H4 chart of EUR/USD shows the extra large head compared to rather small shoulders, which might hint at the pattern’s overall weakness. However, it should still be a good trend-reversing setup. Even though it contradicts my earlier bearish trade on EUR/USD, I still plan to execute this trade if a solid breakout does occur.
The two yellow lines on the image below mark two important levels — the neckline (upper line) and the head (lower line). The entry level is marked with the cyan line, which is placed at 10% of the distance between the two yellow lines added to the neckline. The take-profit level is at the green line, which is placed at 100% of the pattern’s height above its neckline. I will set my stop-loss level to the low of the breakout candle or to the low of the preceding candle if the breakout one trades mostly above the neckline. Bearish breakouts from an inverted head-and-shoulders are not tradable. You can click on the image to see the full-size screenshot.
The chart was built using the ChannelPattern script. You can download my MetaTrader 4 chart template for this EUR/USD pattern. It can be traded using my free Chart Pattern Helper EA.
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Posted on Forex blog.