The Head and Shoulders is a bearish reversal pattern that forms after an uptrend and signals a potential price decline.
Types of the Pattern
Standard: indicates a reversal downward (after an uptrend).
Inverted: indicates a reversal upward (after a downtrend).
This lesson covers the standard version.
How to Identify the Pattern
The structure consists of:
Left Shoulder: first peak.
Head: a higher peak above the shoulders.
Right Shoulder: a lower peak than the head.
Neckline: a support line connecting the lows between the shoulders.
Activation signal: the pattern is confirmed only when the price breaks below the neckline.
How to Trade the Head and Shoulders
Method 1: Aggressive
Entry: at the breakout below the neckline (ideally wait for the candle to close to filter out false breakouts).
Stop-loss: above the right shoulder.
Take-profit: measure the height from the head to the neckline and project it downward from the breakout.
Method 2: Conservative
Wait for a breakout and retest of the neckline (support turns into resistance).
Entry: after the retest confirms the new resistance.
Stop-loss: above the new resistance zone (above the neckline).
Take-profit: same as Method 1 (pattern height downward).
Key Features
The more symmetrical the pattern, the stronger the signal.
Volume: often decreases during the formation of the right shoulder and increases sharply during the neckline breakout.
Works well when confirmed by MACD divergence or RSI exiting overbought levels.
Conclusion:
The Head and Shoulders is one of the most reliable reversal patterns. Combining the breakout with volume confirmation and indicator signals increases the likelihood of a successful trade.