RiskPicksWhat is a Head and Shoulders Pattern?
Head and shoulders is a bearish reversal pattern consisting of three peaks: a left shoulder, a higher head, and a right shoulder that is lower than the head. A neckline connects the lows between the peaks. When price breaks below the neckline, the pattern is confirmed and signals a trend reversal from bullish to bearish.
The structure
- Left shoulder: price rallies, pulls back
- Head: price rallies higher than the left shoulder, pulls back again (often to a similar level as the first pullback)
- Right shoulder: price rallies again but fails to reach the head's height, then starts declining
- Neckline: the line connecting the two pullback lows. This is the trigger level
Inverse Head and Shoulders
The bullish version. Three troughs with the middle one (head) being the lowest. When price breaks above the neckline, it signals a reversal from bearish to bullish.
How to trade it
- Entry: short (or sell) when price breaks below the neckline on a regular pattern. Buy when price breaks above the neckline on an inverse
- Target: measure the distance from the head to the neckline and project it from the breakout point
- Stop: above the right shoulder (for a regular pattern) or below the right shoulder (for an inverse)
- Volume: ideally, volume decreases from the left shoulder to the head to the right shoulder, and then spikes on the neckline break
Head and shoulders is one of the most studied patterns in technical analysis. It works because it shows a clear sequence: buyers are losing strength (lower right shoulder) before sellers take control (neckline break).