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Head & Shoulders Dashboard - an Algorithm for Finding a Classic Reversal Pattern

 
 
 
 
 
 
 

Head and Shoulders is a well-known figure in technical analysis that has appeared in many famous books on trading. The model has become an integral part of technical analysis, to this day, retaining its relevance as a tool for predicting market trends. However, even proven methods require a modern approach.

Head & Shoulders Dashboard is an automatic tool for finding patterns on multiple charts, with the ability to fine-tune and alert about new patterns. The Head and Shoulders pattern is an established psychological model of market players that have not changed for decades. Each new quote results from a fight between bulls and bears, but this fight takes on a correct recognizable form over a relatively long time. Since all traders see the same chart, when a familiar formation is identified, their behavior is synchronized - the emotion factor begins to act.

The pattern consists of three parts - a high peak in the middle and two smaller peaks on the sides. Thus, the first and second peaks form the "shoulders" of the figure, and the peak in the middle forms the "head." The support line drawn at the minimums of the pattern is also a signal line - its breakdown determines the trend change.

The first small peak and the subsequent decline mean a weakening of the upward momentum - a loss of bulls' enthusiasm. However, maintaining momentum, the price continues to move upward, forming a higher high. At this stage, there is still a possibility of the continuation of the bullish movement. But, as soon as the price drops to the previous low level, the further development of events is already predetermined. The bulls make the last attempt at growth, but, as a rule, the price reaches only the nearest resistance level - the level of the first peak, after which it remains to wait for the breakout of the support level and enter the decline.

There is also a reverse pattern - an inverted Head and Shoulders, which forms a buy signal. In this case, instead of three peaks, we have three lows, with the lowest in the middle. The pattern signals the end of a downtrend and the formation of a new movement vector.

Indicator settings

The indicator, which is installed according to the standard instructions, provides a summary table of patterns from all currency pairs and timeframes. The instrument's name indicates each pattern, timeframe, the direction of the signal (bullish or bearish), time of formation (bars ago), and an instant link to the pattern's chart. By clicking on the button with the instrument's name and timeframe, a chart with the detected pattern will open.

The Head & Shoulders Dashboard algorithm contains the following parameters to customize:

Symbols - a comma-separated list of instruments;

Is…Timeframe Enabled - enables or disables the search for patterns on a specific TF;

Sort By - by what indicator to sort the found patterns. It is worth noting that sorting is also available by clicking on the column header;

Sort Type - sorting in ascending or descending order;

Price Proximity Percent - the accuracy of the pattern construction. A higher value will allow you to find more setups;

Fill Patterns with Color - draw shapes with filling;

Display Head and Shoulder - enable/disable the display of a traditional figure;

Display Reverse Head and Shoulder - enable/disable the display of the reverse figure;

Depth, Deviation, Backstep - parameters of the standard ZigZag indicator;

Alert Title - the title of the alert;

Popup Alerts - enable/disable notifications about new signals in the terminal.

Indicator signals

Having received a signal about the formation of a new pattern, the first thing to be determined is the presence of a continuous unidirectional movement. This implies a trend lasting more than 100 bars, regardless of the selected timeframe.

Then, having determined that the trend is up, wait for the pattern to form. At the beginning of the second shoulder formation, draw a support line at the swing lows. This will be a signal line, the breakout of which will indicate a price reversal.

You need to enter the market after breaking through the support level. Confirmation is the closing of the candle behind the level - at the opening of the next one, you can open a market order to sell.

Conclusion

The Head and Shoulders is a time-tested pattern that, when correctly identified, allows you to enter the market at the beginning of a long-term trend. This indicator greatly simplifies the monitoring of Price Action patterns, promptly notifying a new signal's appearance. The trader only has to analyze the found setup and make the final decision on entering the deal.

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