Head and Shoulders Pattern: What It Is and How to Trade It
Head and shoulders is one of the best-known reversal patterns in technical analysis. Here's how to recognize it, where to enter, and how not to mistake ordinary noise for the pattern.
What it looks like
The pattern appears after a rally and consists of three peaks:
- Left shoulder: a high and a pullback.
- Head: a new, higher high and another pullback.
- Right shoulder: a high below the head. The rally has run out of steam.
- Neckline: a line through the lows between the peaks.
The pattern is complete only when the price closes below the neckline. Until then, it's just three peaks.
How to trade it
| How it's calculated | Example | |
|---|---|---|
| Pattern height | From the head to the neckline | 120 − 100 = $20 |
| Entry | After the neckline break or on the retest | ≈ $99 |
| Target | Neckline minus height | 100 − 20 = $80 |
| Stop-loss | Above the right shoulder | ≈ $112 |
The target is a guide, not a promise: the price may stop earlier. A stop is mandatory.
The inverse pattern
The mirror version appears after a decline: three troughs, with the middle one the deepest. A break above the neckline hints at a reversal upward.
Mistakes
- Entering before the neckline breaks: the pattern may never complete.
- Spotting the pattern on a minute chart: there are too many of them there, and they're unreliable.
- Ignoring volume: volume usually rises on the neckline break.
Other patterns are covered in the lesson candlesticks and chart patterns; the basics are in the article how to read a chart.
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- Head and shoulders is a reversal pattern with three peaks.
- The signal is a close beyond the neckline, not before.
- The target is the pattern's height; the stop goes beyond the right shoulder.
Frequently Asked Questions
How reliable is the head and shoulders pattern?
No pattern is 100% reliable. It works more often on higher timeframes and with rising volume on the breakout, but it can still fail.
What if the price climbs back above the neckline?
That's a false breakout: the pattern has failed. Your stop-loss will trigger, and that's a normal part of trading.
Is the neckline always horizontal?
No, it can be sloped. What matters is that it runs through the lows between the shoulders and the head.
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