Head and Shoulders Pattern
Learn to recognize and trade a head and shoulders pattern through interactive charts.
What is a head and shoulders pattern?
A head and shoulders pattern is a bearish reversal pattern, which marks the end of an uptrend and the beginning of a downtrend.
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Head and shoulders duration
A head and shoulders pattern can occur over various time frames.
Head and shoulders characteristics
A head and shoulders pattern contains three successive peaks. The highest peak is called the head. The two outside peaks are called left and right shoulders.
- This pattern requires a strong prior uptrend.
- Left shoulder: the price forms a peak in the current uptrend, before retracing to trend. This completes the formation of the left shoulder.
- Head: the price rises again from the trough of the left shoulder, and reaches a new high that marks the head. After peaking, the price falls back to the trough of the left shoulder. The line connecting both troughs is called the neckline.
- Right shoulder: the price rises again from the neckline but is unable to establish a new high, as sellers outnumber buyers. The price retraces back to the neckline, completing the right shoulder. While symmetry is preferred, it is not mandatory.
- Neckline: the neckline can be horizontal, downward sloping or upward sloping. A Head and Shoulders pattern is always bearish, but one with a downward sloping neckline is even more ominous.
A head and shoulders pattern points to a loss of momentum. It usually occurs after a strong and long lasting uptrend. This is why volumes often decline in the period leading up to the pattern.
Head and shoulders trading tips
A convincing close below the neckline completes the head and shoulders pattern. Some traders wait for an unsuccessful re-test of the neckline before opening a short position. This means waiting for the neckline to act as a resistance, rather than support. You may want to wait for several closes below the neckline, rather than acting on the first.
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