Intraday Trading Strategy - Head and Shoulders Pattern 06/28/2010

A common intraday trading strategy is to use some type of pattern recognition combined with technical analysis. On 06/28/2010 I recognized a potential trading opportunity triggered by a Head and Shoulders pattern.

More specifically, it was an Inverse Haed and Shoulders pattern, meaning, it was upside down on the chart, displaying a long entry point. Take a look at the chart below:

Intraday Trading Strategy - Head and Shoulders

Keep in mind that this example is for a trading opportunity for scalping - a quick intraday small gain, not a signal for a multi day position. Although in many cases you can take an example like this one and use the same technique on a larger time frame chart to look for longer term trading opportunities such as Swing Trading and longer term investing.

Notice on the chart I have added a couple of lines to recognize:

  • I've added the thin red line displaying the Inverse Intraday Head and Shoulders pattern. You can see how this has occured very clearly.
  • You'll also notice I've added the Neckline, a requirement and key signal in this type of pattern. The Neckline in this case is sloping down.

The long entry signal in this case was upon prices moving higher, up through the Neckline I've displayed. As you can see, this worked out nicely and produced a profitable short term trading opportunity for those who were able to act and take advantage.

You'll notice I've used DIA in my chart example but to provide a little more price movement potential, or volatility, one could have used a different security instrument such as DDM, in this case, or others that track other indices.

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