Head and Shoulders Testing

Written by Hugh, on November 3rd, 2008

I just completed another round of testing on the GBPJPY 1 hour charts, testing only the head and shoulders pattern. My parameters were:

Look for bounce of right shoulder near the same level as the left shoulder.
The bounce has to be confirmed by a candle that either shows a long wick at the left shoulder level or a sharp rejection of that level.
Place stop 15-20 pips above the rejection candle of right shoulder.
Target previous swing low/high and be sure reward/risk is >= 1:1.

Here are the results:
Total trades=28
Profit trades=24
Loss trades=4
Trades/day=0.01
Trades/month=0
Profit trades/month=0
Loss trades/month=0
Max profit trade=124.37
Max loss trade=50.08
Net profit=1196.52
Gross profit=1328.75
Gross loss=132.22
Profit/month=14.57
Average profit=55.36
Average loss=33.06
Max drawdown=271.39
Profit factor=10.05
Return, %=11.97
Max lot used=0.1
Restoration factor=4.41
Reliability factor=0.05
Profit probability, %=86
Loss probability, %=14

As you can see, it is a very reliable pattern with this pair but it doesn’t come along often. I backtested on 6 years of historical data and there were only 28 trades triggered on the 1 hour chart.

Of course, the reason that it didn’t come along too often may be because I’m not identifying the pattern correctly. The price action of this pair seems to be characterized by sharp trends followed my very distinct consolidation periods, not creating the best environment for the head and shoulders pattern. But don’t take my word for it, test it yourself and let me know what you think!

I am now going to go back on the trades and see what characterizes a good head and shoulders trade in the GBPJPY and where there any head and shoulders patterns that I missed. I will let you know the results in a future blog.

All testing done in Forex Tester.

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