Taking Advantage Of A Head And Shoulders In The British Pound

<

Futures and options trading contain substantial risk of loss and may not be suitable for all investors.

The chart above is a daily continuation chart of the front month British Pound futures contract. We believe this to be a Head and Shoulders top formation where the Neckline has already been broken. Frequently markets will retrace a return to the Neckline and that may be what is occurring. This often provides an opportunity for a trade if not already involved.

Typically when there is a H&S set up traders who look for and follow these developments will enter a position upon the breaking of the neckline. If not, a return to the neckline affords that second chance opportunity. In this example the return to Neckline is currently at ~ 16190.

Measuring the price target is determined by taking the distance from the top of the head to the neckline subtracted from the point of where the market price breaks the Neckline. In this case the high and Head (Basis front month) on this chart is the August 5 high of 17043. When we draw a line down from the Head to the Neckline we find that point to be approximately 16040. This distance, then, is approximately 1000 points. We can see that the market broke through the Neckline on September 24 when the Neckline was at approx. 16135. Subtracting the distance from the Head to the Neckline of approx. 1000 points from the point of Neckline break - ~16135 – provides a price objective of approx. 15135.

In the British Pound each point, or tick, is worth $6.25. Short entries from the point of the Neckline break to the ~15135 price target could gross approx. $6,250. If a short entry were to be made at today’s approximate value of the return to the Neckline at ~16190, a move to and trade exit at the price target of 15135 if realized would be $6593.75. This is all based, of course, on not only being provided the opportunity but seizing it if presented and then the most important part the magic of the market seeking and reaching the price objective. It doesn’t always work perfectly, in fact more like rarely, and anything can happen and usually does. That’s why trade management is so integral to success.

We have also provided Fibonacci Retracement levels incorporating the January 23 low and the August 5 high as other price support possibilities. They are ~15700; ~15275; ~ 14856.

We hope this is found to be helpful and beneficial if not somewhat educational for those not familiar with this process. If any questions, comments or better yet any answers please make sure to contact us.

Cheers and Good Trading

Jeff
Diego