It goes without saying that market tactics play an important role in all types of trading. Some traders get a little more aggressive when they are seeing a Head and Shoulders pattern and don't wait for the breaking of the neckline to make their next move. Believing they have correctly identified the Head and Shoulders bottom, they will initiate new long positions during the formation of the right shoulder or buy the first technical signal that the decline into the right shoulder has ended.

As seen in the chart below, some traders measure the distance of the rally points from the bottom to the head (points C to D), and buy 50% to 66% retracement of that rally. Another tactic is to draw a tight trendline along the decline from point D to E, and buy at the first upside break of that trendline. Since Head and Shoulder patterns are reasonably symmetrical, some traders buy into the right shoulder as it approaches the same level as the bottom of the left shoulder. There is usually a lot of anticipatory buying during the formation of a right shoulder. When the trader's initial probe is successful, he is likely to add more positions when the neckline is actually penetrated or on the return move back to the neckline after the breakout.



Andy Swan is co-founder and head trader for DaytradeTeam.com. To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.