Definition
"We're talking about false tops and bottom patterns as it relates to classical head and shoulders"
"Marketing is actually designing classical chart patterns in price where you can actually get tripped up thinking just because you saw a head shortage formation and the neckline's broken"
"I see that as a retail trap"
Classical Head and Shoulders Pattern
Standard Head and Shoulders (Bearish)
"Head and shoulders pattern is typically seen with a price high that trades in a small little retracement then it creates a higher high and it retraces back lower and it creates another lower price peak or short-term high and then connecting those three successive peaks in price we classically refer to that as the neckline"
"Classical support resistance ideas are seen here where if that neckline is broken many times you'll see it retrace or pull back up to that neckline and then sell off again"
"In the form of selecting targets you can measure the range from the neckline up to the head or the highest peak and subtract that range from the neckline once price breaks below it and I'll give you a reasonable price objective"
Inverted Head and Shoulders (Bullish)
"The opposite is referred to as an inverted head and shoulders pattern this is a false pattern false bottom pattern"
"An inverted head and shoulders pattern is typically seen with a short-term low that's met with a lower low then it makes a higher short-term low and you connect the highs that form around those three successive lower lows and we refer to that as the neckline"
"Eventually should price trade above that neckline classically you would expect a pullback in price or retrace it back down to the neckline and then advance me up to the target and the range from the neckline down to the lowest low of those three lows added to the neckline once the price breaks through it that would give you a reasonable upside objective"
Problems with Classical Patterns
Where They Genuinely Form
"Generally price will form these genuinely at intermediate or long-term highs only"
"Generally price will form these genuinely at intermediate or long-term lows"
Retail Trader Mistakes
"Due to the low understanding of most retail traders they tend to seek these classic topping patterns on lower time frames"
"And many times at a significant low in price but they marry the pattern"
"Due to the low understanding of most retail traders they go into the lower time frames and they start looking for this classic modern pattern on lower time frame charts and many times at a significant high in price"
Forced Pattern Recognition
"You get these textbooks and you get these ideas and you go in you force the understanding of what you learned out of the books into the charts so therefore you learned about head and shoulders patterns so therefore there must be a head and shoulders pattern right now so let's go in there and trade it"
"And unfortunately it doesn't always equate to profitability"
Top and Bottom Picking
"Picking tops and bottoms is one of the worst games to play especially the new trader because number one even seasoned pros don't do that okay we don't we don't pick tops and bottoms"
"We can trade with rather impressive new accuracy in in catching significant intermediate term lows and short-term lows and highs but as it relates to long-term tops and bottoms I try to avoid that"
Institutional Order Flow Perspective
"By going through institutional order flow studies and watching how interbank pricing is delivered it allows me to go in and actually see these patterns when they form in price charts"
"If i have a indication that the price is actually going to go higher and i see a head and shoulders pattern which would be a false top in my opinion but in the charts retail will see that as a top forming"
"Conversely looking at it inverted head and shoulders which would be classically viewed as a bullish pattern in price if i see that happening when the market is actually bearish i would be looking to go short"
Trading Against Standard Head and Shoulders
Prerequisite
"If we are in a institutionally trained bullish environment that means if we're in a long term or immediate term low"
Pattern Recognition
"And it forms a successive three peaks in price moving higher which would be classically viewed as a head shoulders pattern um chartist pure chartist would see that as a bearish indication especially new newbie traders or less informed traders"
ICT Interpretation
"I like seeing when price does that because to me it's a retail trap"
"When that neckline is broken i don't see that pullback as a resuming lower or a new selling scenario i see that as a turtle soup long that took out two previous lows where the clean lows were there"
Entry Logic
"I look at that as a buying opportunity so i'll buy the cell stops below those equal lows or where the neckline is"
"We see this move below these equal lows as an opportunity to buy those sell stops those willing sell stops or flood the market when the market trades below here so now we have a lot of liquidity"
Exit Strategy
"And then i'll look for the head or the highest peak to be violated and i'll try to pair up my long exits with the buy stops above the highest high in this pattern and that would be my first objective"
"You can actually take your first profit at the right shoulder on both these patterns respectively"
Trading Against Inverted Head and Shoulders
Prerequisite
"If i'm looking for price action to be bearish as a higher time frame would indicate"
Pattern Recognition
"And i see a low with a lower low and a higher low which would be deemed as a inverted head and shoulders"
ICT Interpretation
"I don't see that as a bullish breakout above the neckline i'm actually looking at that as a run on buy stops"
"Retail's gonna be all over that looking for bullish you know upside moves"
Entry Logic
"And i'm going to look to go short there and not expect to see price go higher"
"We're going to look at it as a bearish pattern we're going to be completely opposite of that"
Exit Strategy
"But in fact blow out those equal highs and then make a run for the cell stops below what would be deemed as the head on this pattern or would be the lowest low and most recent price action"
Chart Examples from Transcript
Example 1: British Pound Daily Chart - Standard H&S Trap
"We're looking at a daily chart of british pound usd or cable"
"This down candle was a bullish order block which is used to break the buy stops that were in the marketplace here"
"So on this day here we trade down into it on the 12th of august 2015 shaded right down into the body of that down candle which is a bullish water block now that's bullish on a daily"
"So here we have the market making a high a higher high and a lower high and we have two equal lows in here so we have what we have a head and shoulders pattern"
"Retail traders are going to see that as a selling scenario"
"So retail is going to think this breakdown here is going to lead them down to 155 or thereabouts in this range here so retail is going to expect a range expansion down to a low of 154.95"
"We do not expect that because on the daily chart we're expecting the bullsh order block to send prices higher"
"We're looking at the run below these lows in here as they run on sale stops"
"So we could be a buyer at 155.50 and look for 5620 a move above this high 5620 as our objective or 70 pips"
"The market runs one two three four more times below that low gathering up the cell stops and then expansion which pairs up the buy stops above 5620"
Example 2: British Pound Daily Chart - Inverted H&S Trap
"When price trades below it here when price comes back up to it here we're inside of a breaker that's a bearish environment 153 45 to 153.50 in that area we're looking for a reason to expect some kind of a bearishness"
"There's going to be on a lower time frame retail will see patterns like this we have a low a lower low higher low this is an inverted head and shoulders pattern"
"The stops below here would be would be targeted so selling up here on a break above the neckline not looking at that as bullishness and return for higher prices but looking for it to sell off getting above there"
"So we would look for that run to sell into the buy stops above this high here and above this high here that's why i would expect to see some bears this year and then we would wait for a run below these lows here"
Example 3: October 2015 - Inverted H&S Short
"So if we get above that high we can be a seller because we would expect those buy stops to be viewed as breakout artists on in inverted head and shoulders they're going to see that as bullish pattern we're going to look at it as a bearish pattern we're going to be completely opposite of that"
"This is the highest body of the candle so 5502 would be a cell if we get above it"
"So 5502 is your area being bearish we do not look at that as a breakout and then wait for a pullback for new higher prices we're looking to see it sell off and there's your entry on the buy stops at 55.02"
"And the neckline i'm sorry the head down here your objective would be to cover below that low right here"
Study & Review
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