Head and Shoulders Pattern

What is a Head and Shoulders Pattern?

The Head and ShouldersHead and ShouldersA bearish reversal pattern featuring a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder), all resting on a sup...Read full glossary entry → pattern is a bearish reversal chart pattern that indicates an uptrendUptrendA market direction characterized by a sequence of higher highs and higher lows.Read full glossary entry → is losing steam and is likely to reverse downward. It consists of three successive peaks:

1. Left Shoulder: A peak followed by a decline to a supportSupportA price level where buying pressure is strong enough to prevent the price from falling further. It represents a "floor" on the chart.Read full glossary entry → level.
2. Head: A higher peak followed by a decline back down to the same supportSupportA price level where buying pressure is strong enough to prevent the price from falling further. It represents a "floor" on the chart.Read full glossary entry → level.
3. Right Shoulder: A third peak that is lower than the head (and roughly equal to the left shoulder), followed by a decline.

The line connecting the lows of the three formations is called the neckline.

Key Components to Watch

• The Neckline: The support line that connects the lows between the shoulders and the head. A break below this neckline triggers the pattern.
• VolumeVolumeThe total number of shares, contracts, or units of a security traded during a specified time period.Read full glossary entry → Signature: VolumeVolumeThe total number of shares, contracts, or units of a security traded during a specified time period.Read full glossary entry → is typically highest during the left shoulder, lower during the head (showing waning buying pressure), and lowest during the right shoulder. A surge in volume during the neckline breakoutBreakoutA price movement through an established support or resistance level. A breakout is often accompanied by increased volume, signaling strong momentum.Read full glossary entry → confirms the pattern.
• Symmetry: The left and right shoulders should be relatively symmetrical in height and width.

How to Trade the Head and Shoulders

• BreakoutBreakoutA price movement through an established support or resistance level. A breakout is often accompanied by increased volume, signaling strong momentum.Read full glossary entry → Entry: Traders typically enter a short position once the price breaks and closes below the neckline.
• RetestRetestA price movement back to a previously broken support or resistance level to verify it holds as the opposite barrier.Read full glossary entry → Entry: Sometimes, the price will break the neckline and then rally back to test the neckline as new resistanceResistanceA price level where selling pressure is strong enough to prevent the price from rising further. It represents a "ceiling" on the chart.Read full glossary entry →. This retestRetestA price movement back to a previously broken support or resistance level to verify it holds as the opposite barrier.Read full glossary entry → offers a lower-risk short entry.
• Price Target: The minimum expected target is calculated by measuring the vertical distance from the peak of the Head to the Neckline, and projecting that same distance downward from the breakout point.
• Stop-Loss: A stop-loss is commonly placed above the high of the Right Shoulder. If price rises above the right shoulder, the bearish structure is invalidated.