Head and Shoulders Pattern

Head and Shoulders Pattern

The head and shoulders pattern is a common technical-analysis formation that signals a likely reversal of a prevailing trend. The standard (bearish) head and shoulders suggests an upcoming reversal from an uptrend to a downtrend; the inverse (bullish) version signals a reversal from a downtrend to an uptrend.

Components and identification

Bearish head and shoulders
* Left shoulder: price rises to a peak then declines to a trough.
* Head: price rallies to a higher peak then declines again.
* Right shoulder: price rises to a peak similar to the left shoulder, then falls.
* Neckline: a line drawn across the two troughs (it can be horizontal or sloped). A decisive break of the neckline confirms the pattern.

Inverse (bullish) head and shoulders
* Three troughs instead of peaks: a deeper middle trough (the head) flanked by two shallower troughs (the shoulders).
* Neckline drawn across the two intermediate highs. A break above the neckline signals a likely trend reversal upward.

What the pattern tells you

• The pattern reflects weakening momentum in the prevailing trend (bullish in the standard pattern, bearish in the inverse).
• A confirmed breakout of the neckline is interpreted as the start of the new trend (downward after a regular head and shoulders; upward after an inverse).
• It is widely regarded as one of the more reliable reversal patterns, though not infallible.

How to trade the pattern

Entry
* Typical entry is on a confirmed break of the neckline (close beyond the neckline or a strong break on volume).
* Some traders wait for a retest of the broken neckline as resistance/support before entering.

Stop-loss placement
* Place a stop above (for a short after a regular H&S) or below (for a long after an inverse H&S) the right shoulder or a recent swing extreme.
* Because the pattern can span long timeframes, stop distances may be large—manage position size accordingly.

Profit target
* Measure the vertical distance from the head (highest point for a regular H&S, lowest for an inverse) to the neckline.
* Project that distance from the breakout point: for a bearish H&S subtract the height from the neckline-break level; for an inverse add the height to the breakout level. This provides a primary target.

Risk-management and confirmation
* Use stops and position sizing to control risk; false breakouts occur.
* Additional confirmation (volume behavior, retests, wider market context) can improve probability but never guarantees success.

Advantages and disadvantages

Advantages
* Easily recognized by experienced traders.
* Provides clearly defined entry, stop, and target levels.
* Can lead to sizable moves because patterns often form over extended periods.
* Applicable across markets (stocks, forex, commodities).

Disadvantages
* Novice traders may misidentify the pattern—necklines can be sloped or uneven.
* Large stop distances are common, producing unfavorable reward-to-risk unless position size is adjusted.
* The neckline can be retested or appear to “move,” producing confusing signals and false breakouts.

Practical tips

• Require a decisive close beyond the neckline or a retest to reduce false signals.
• Consider volume: many traders look for lower volume on the head and right shoulder and higher volume on the breakout (though this is not guaranteed).
• Adjust expectations and position sizing when the pattern spans long timeframes.
• Use the pattern as one tool within a broader trading plan—not in isolation.

Conclusion

The head and shoulders and its inverse are valuable reversal patterns that offer a structured approach to identifying potential trend changes and setting entries, stops, and targets. They are reliable when properly confirmed, but like all technical tools they carry risk and should be combined with prudent risk management and additional confirmation methods.