Chart Your Way to Profits: The Online Trader's Guide to Technical Analysis with ProphetCharts, Second Edition

Chapter 13. Head and Shoulders

So far in this book we have learned about a wide variety of analysis methods for financial charts. Saucers, multiple tops and bottoms, trendlines, and channels are just a few of the methods we have examined. After seeing so many charts with successful outcomes of applying these techniques, it can be tempting to place a trade on any chart that resembles one of the patterns shown. One might start to think that these patterns yield some kind of mystical power that can be exploited by those who understand them.

This is not the case. There is no sorcery involved with technical analysis. Any trade, after all, is a guess. It is hopefully an educated, well-informed guess with appropriate safety measures (like stop orders) in place to minimize your risk. But remember that the word "speculate" is derived from the Latin verb speculare, which means "to observe." It does not mean "to gamble." The object of good speculation is to observe well the information in front of you (in our case, well-drawn charts) and make a decision based on sound principles.

The patterns in this book don't always work. There are many times when there seems to be a perfect setup, and the charts go sour on you. That's okay. As long as you have a stop price in place that shields you from unreasonable losses, you can preserve the majority of your capital and move on. So if you lose 5 percent on four different trades and make 50 percent on another trade, all of which were based on the same pattern, ...