Contact Us

What Is a Head and Shoulders Pattern?

The Head and Shoulders is a reversal pattern that signals a shift from an uptrend to a downtrend. It consists of three peaks:

  • Left Shoulder – a peak formed after a bullish move before a minor pullback.
  • Head – the highest peak, showing strong buying pressure before the trend weakens.
  • Right Shoulder – a lower peak indicating fading bullish momentum.
  • Neckline – the key support level connecting the lows after the left and right shoulders.

Once the price breaks below the neckline, it confirms a bearish trend reversal.

How the Head and Shoulders Pattern Forms

To understand the structure, imagine the market in an uptrend:

  1. Left Shoulder:
    Buyers push the price up, but face resistance, leading to a temporary drop.
  2. Head:
    The price rallies again and makes a higher high, but buyers are unable to hold the momentum.
  3. Right Shoulder:
    Price rises again, but only to a level lower than the head, showing weakening buyers.
  4. Neckline Break:
    When the price breaks the neckline support, it suggests sellers are taking control, confirming a potential downtrend.

This pattern visually represents strength → weakness → reversal.

Why the Head and Shoulders Pattern Is Popular

The Head and Shoulders pattern is considered highly reliable because it reflects real market psychology:

  1. Exhaustion of buyers
  2. Decreasing bullish momentum
  3. Increasing bearish pressure
  4. Clear breakdown level (neckline)

It helps traders identify trend reversal points with strong accuracy when combined with other indicators like volume, RSI, or moving averages.

How to Trade the Head and Shoulders Pattern

Here’s a simple, effective trading approach:

1. Identify the Pattern Clearly

Before entering a trade, make sure the structure is complete:

✔ Uptrend before the pattern
✔ Three peaks (left shoulder → head → right shoulder)
✔ Right shoulder is lower than head
✔ Visible neckline

Avoid entering a trade too early while the right shoulder is forming.

2. Wait for the Neckline Breakout

The neckline is the most important part of this pattern. A bearish breakout below the neckline confirms the reversal.

Many traders wait for:

  • A full candle close below the neckline
  • Retest of neckline (optional but adds confluence)

3. Enter the Trade

You can enter:

  • On the breakout candle
  • On a retest of the neckline (safer but may miss the move)

4. Set Stop-Loss

Place your stop-loss:

  • Above the right shoulder
    or
  • Above the head (very safe but larger stop)

This prevents false breakout losses.

5. Set Take-Profit

A popular technique is measuring the distance:

Head to neckline = Target distance downward

Example:
If the head is 120 pips above the neckline, the potential drop after breakout may also be around 120 pips.

Inverse Head and Shoulders Pattern (Bullish)

The opposite version — Inverse Head and Shoulders — signals a reversal from a downtrend to an uptrend.

Instead of peaks, this pattern forms three valleys:

  • Left shoulder → head (lowest point) → right shoulder
  • Break above neckline triggers a bullish move

Traders use it to find buying opportunities.

Common Mistakes Traders Make

Even though the pattern is reliable, traders often lose due to:

❌ Entering before the neckline break
❌ Misidentifying the pattern in a choppy market
❌ Ignoring volume or trend strength
❌ Setting stops too close

Being patient and waiting for confirmation is the key.

Table of Contents