Head and Shoulders Pattern: A Trader’s Warning Sign
In the world of technical analysis, few shapes are as feared—or as profitable—as the Head and Shoulders. It is the universal sign that an uptrend is dying and a downtrend is beginning. Visually, it looks exactly like its name: a peak (Head) flanked by two smaller peaks (Shoulders). However, the magic isn’t in the shape itself, but in the “Neckline.” Here is how to spot this reversal signal and execute the trade without getting trapped by a fake breakdown.
1. The Rule: Anatomy of the Pattern
It tells a story of a war between Bulls and Bears.
2. Head: Price rises to a higher peak and declines again. (Buyers still in control).
3. Right Shoulder: Price tries to rise but fails to reach the Head’s height. (Buyers are weak).
4. Neckline: The line connecting the lows of the two troughs. This is the “Floor.” If it breaks, the floor collapses.
2. Bullish vs. Bearish (Checklist)
Don’t confuse the two. One means “Sell,” the other means “Buy.”
| Pattern Name | Visual Shape | Signal |
|---|---|---|
| Head & Shoulders (Standard) |
Three peaks (Middle is highest). Like a mountain range. | SELL / SHORT (Bearish Reversal) |
| Inverse H&S (Reverse) |
Three valleys (Middle is lowest). Like a person hanging upside down. | BUY / LONG (Bullish Reversal) |
| Volume Trend | Volume usually decreases on the Right Shoulder. | Confirmation (Weakness is real) |
3. Timeline: The “Breakout” Moment
The pattern is useless until the Neckline breaks. Patience is the only way to trade this.
| Formation Stage | Action | What to Watch |
|---|---|---|
| Right Shoulder Forms | Wait | |
| Neckline Break | SELL | |
| The Retest (Optional) |
Add |
4. Strategy: The “Measured Move”
How far will the stock fall? There is a math formula for that.
- Step 1: Measure the distance from the top of the Head to the Neckline. (e.g., Head is $100, Neckline is $80. Distance = $20).
- Step 2: Subtract that amount from the breakout point. (Breakout at $80 – $20 = Target).
- Step 3: Set your “Take Profit” order at $60. This is the “Measured Move.”
5. Warning: The “Head Fake”
Patterns fail.
⛔ Failed Breakdown
Sometimes, price dips below the neckline for one hour, traps the bears, and then rockets back up.
- The Fix: Never trade based on the intraday price. Wait for the candle close (e.g., Daily Close or 4-Hour Close) to confirm the breakdown is real.
- Stop Loss: Always place a Stop Loss just above the Right Shoulder. If price goes back above that shoulder, the pattern is dead.