What is the head and shoulders pattern?
Head and shoulders is a bearish reversal chart pattern.
It tends to appear after an uptrend, when buyers show signs of weakness.
The pattern consists of three highs:
- The first forms the left shoulder
- The second forms the head and rises above the other two
- The third forms the right shoulder
The two lows on either side of the second high let you draw the neckline.
How do you recognise it?
Several features help you recognise a head and shoulders:
- An initial uptrend: the pattern generally appears after a rise
- A first high followed by a pullback: this is the left shoulder
- A higher second high: this is the head, above the other two highs
- A third high below the head: this forms the right shoulder and shows that price can no longer rise as far
- Two lows between the highs: these let you draw the neckline
- A horizontal or slightly sloping neckline: either is fine as long as the overall structure makes sense
The main difference from a triple top is that the three highs aren't level, because the head is above both shoulders.
How do you trade head and shoulders?
The pattern is considered confirmed when, after the third high (the right shoulder), price moves below the neckline and closes beneath it.
The stop-loss often goes above that same high.
For a short entry, you can sell on the breakout or afterwards.
Then set a target by measuring the distance from the top of the head to the neckline and projecting it below the neckline from the breakout point.
There is also an inverted version, the inverse head and shoulders, which signals a bullish reversal instead.
