Head and Shoulders Pattern

The Head and Shoulders pattern has three peaks—one high between two lower ones. It signals a weakening uptrend and a possible shift to a downward trend.
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Head and Shoulders Pattern
OPEN ACCOUNT
3 mins read
24-June-2025

A head and shoulders pattern is a technical analysis tool used to predict a bearish trend reversal. It appears as a baseline with three peaks, where the two outer peaks are roughly the same height, and the middle peak is the highest.

The pattern forms when a stock's price rises to a peak and then falls back to its previous level. The price then rises above the previous peak to form the "head" and subsequently falls back to the original level. Finally, the stock price reaches a third peak, approximately the same height as the first, before declining.

What is a head and shoulders pattern?

The head and shoulders pattern is a candlestick chart formation that consists of three consecutive peaks. The second peak (which represents the ‘head’) is higher than the other two (which represent the ‘shoulders’). Also known as the shoulder-head-shoulder pattern, this formation occurs at the end of a bullish trend.

A head and shoulders pattern is a technical analysis indicator that helps investors identify a potential trend reversal. It is a bearish reversal chart pattern, which indicates that the stock is likely to stop its bullish trend and enter a bearish trend, where the stock price will fall from the current levels. The pattern consists of three peaks: the middle peak (the "head") is higher than the two outside peaks (the "shoulders").

The head and shoulders pattern is formed when the stock price reaches its peak after increasing for a while and then falls down to the base of the prior up-move. Afterwards, the stock price rises higher than the previous peak price to form the pattern’s ‘head’ and then falls back to the initial base. Lastly, the stock price reaches the peak once again around the first peak’s level and falls back down, making the ‘shoulder’ of the chart pattern.

The head and shoulder pattern is considered one of the most trustworthy and reliable chart patterns that indicates a shift from the current uptrend to a downtrend. Investors can use the head and shoulder pattern to either book profits at the current levels for existing stocks or wait for the price to go down to make a fresh entry.

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How does the head and shoulders chart pattern work?

In a typical head and shoulders stock pattern, the price of a stock rises to form the first peak. Then, it falls to the base or the neckline before rising past the first peak to form the second peak (or the head). After this, the price declines again to the neckline before rising to form the third peak. From here, it falls steeply below the neckline, indicating a reversal from a bullish to a bearish trend.

Interpreting the head and shoulders pattern

To break it down, there are four components to the head and shoulders pattern:

  • The left shoulder: Here, the prevailing buying pressure is temporarily quelled by the selling pressure.
  • The head: Here, the buying pressure increases once more and surpasses the earlier peak before the selling pressure takes over.
  • The right shoulder: Here, buyers drive the price up once more, but the price eventually fails to rally to its previous peak.
  • The neckline: This is the support level below which the price falls at the end of the third peak — confirming the bearish reversal. 

The inverse head and shoulders pattern

Similar to how the head and shoulders stock pattern confirms a bearish reversal, its inverse pattern signals a bullish reversal. The inverse head and shoulders pattern is simply the regular pattern turned upside down. So, it consists of three troughs, where the central trough is deeper than the other two. There is also a neckline that indicates the resistance level.

Let’s break down the inverse head and shoulders pattern to interpret it better. It consists of the following components:

  • The left shoulder: This is the first trough where the existing selling pressure temporarily gives in to the buying pressure.
  • The head: This is the second (and the deepest) trough, which dips past the earlier trough because the selling pressure increases again before the buying pressure takes over.
  • The right shoulder: This is the third trough where the sellers drive the price down again, but it fails to drop as low as the second trough and eventually rallies upward instead.
  • The neckline: This is the resistance level above which the price breaks out at the end of the third trough — confirming the bullish reversal.

Advantages of the head and shoulders pattern

1. Experienced traders identify it easily

2. Defined profit and risk

3. Big market movements can be profited from

4. Can be used in all markets

The head and shoulders pattern is widely used in technical analysis due to its strong predictive capabilities. Here are some key advantages:

  • Trend reversal signal: It effectively signals a potential reversal in the current trend, helping traders exit or enter positions strategically.

  • Clear structure: The pattern has a well-defined shape, making it relatively easy to identify once formed.

  • Risk management: It allows traders to set stop-loss levels just above or below the shoulders, minimising potential losses.

  • Better reward potential: When executed correctly, it offers favourable risk-to-reward ratios.

Disadvantages of the head and shoulders pattern

1. Novice traders may miss it

2. Large stop-loss distances possible

3. Unfavourable risk-to-reward possible

While the head and shoulders pattern is popular, it has certain limitations that traders should be aware of:

  • Complex identification: It can be difficult to spot accurately in real-time, especially in volatile markets where price movements are irregular.

  • False signals: The pattern may occasionally give misleading signals, leading to premature trades.

  • Timing challenges: Predicting the exact point of breakout can be tricky, resulting in missed opportunities or delayed entries.

  • Unfavourable risk-reward ratio: In some market scenarios, the potential reward may not justify the risk involved.

How to confirm the signals offered by the head and shoulders pattern?

You can confirm the reversal indicated by the head and shoulders share pattern using the trading volume and the time frame. Here’s how.

1. Volume confirmation

Check if the trading volume decreases when the price moves up towards the head and right shoulder but increases as the price falls past the neckline. This indicates reduced buying interest and increasing selling interest.

2. Time frame confirmation

The time frame of the bullish trend that precedes the head and shoulders pattern must be at least twice as long as the time frame over which the pattern occurs. This signals a strong trend leading into the pattern, making the reversal more significant for traders.

Top reasons the head and shoulders pattern can be a reliable reversal indicator

How to trade using head and shoulders pattern?

The head and shoulders pattern is considered to be one of the ideal technical indicators that indicate that the current bullish trend is likely to end, and the stock price will fall as the selling pressure rises. Once you identify the head and shoulders pattern, you can follow the below steps to trade:

  • Identification: The first step is effectively identifying the head and shoulders pattern. Ensure that the pattern is perfectly formed and has all three peaks: the left shoulder, the higher head, and the right shoulder. The neckline should also be clear, connecting the lows between the shoulders and the head.
  • Neckline break: The most important step in pattern formation is the neckline break when the price breaks below the neckline. It is important to enter the trade only after the neckline break, as entering a trade before it may be highly risky.
  • Entering trade: When the price closes below the neckline, enter a short position or sell, exiting a long position. Investors with a high-risk tolerance can enter trades right after the formation of the right shoulder as they may anticipate the neckline break.
  • Setting stop loss: Placing a stop loss is vital, as trading using the head and shoulders pattern can be risky. Ideally, you should put a stop-loss above the right shoulder, as this can be an ideal resistance price level. If you have a lower risk tolerance, you can put a closer stop-loss just above the neckline if you have entered the trade after the break.
  • Profit target: To make better trades using the head-and-shoulders pattern, it is important to set a profit target beforehand. You can determine an ideal profit target by measuring the distance from the top of the head to the neckline. Once done, subtract this distance from the neckline breakpoint to set your profit target. Exit the trade when the price reaches the calculated target to realise profits.

Conclusion

You may find it easier to identify a head and shoulders share pattern or its inverse with the details outlined above. Utilise the volume and time frame indicators to confirm the strength of the trend reversal before you make trading decisions based on the head and shoulders pattern.

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Frequently asked questions

Is a head and shoulders pattern bullish?

No, a standard head and shoulders pattern is considered bearish. It typically signals that an upward trend is nearing its end, and a downward reversal may follow. It’s widely regarded as one of the most reliable indicators of a potential trend reversal in technical analysis.

What is the target of a head & shoulders pattern?

The profit target is usually calculated by measuring the vertical distance from the head to the neckline. This same distance is then projected downward from the breakout point, giving traders a potential downside price target for exits or setting stop-loss levels.

What causes a head and shoulders pattern?

The pattern forms due to waning bullish momentum. Prices peak (left shoulder), rise higher (head), then form a lower peak (right shoulder). This reflects weakening buying pressure and growing selling interest, suggesting that the uptrend is likely to reverse into a downtrend.

What is a real head and shoulders pattern?

A real head and shoulders pattern forms when a stock’s price shows three peaks—two smaller ones (shoulders) on either side of a higher one (head). This typically appears at the top of an uptrend and signals that the trend is losing strength and may soon reverse.

What are the rules for head and shoulders pattern?

Here are some key rules for identifying a head and shoulders pattern:

  1. pward trend: The pattern should appear after a prior uptrend in stock price.
  2. Head: The middle peak (head) must be the highest point.
  3. Shoulders: The left and right shoulders should be roughly equal in height and lower than the head.
  4. Neckline: A trendline can be drawn connecting the swing lows before and after the head. A break below this neckline is considered the confirmation of a potential downtrend.
Can a head and shoulders pattern be bullish?

The head and shoulders pattern is a well-respected indicator of trend reversals, signaling a shift from a bullish to a bearish trend. Conversely, the inverse head and shoulders pattern indicates a reversal from a bearish to a bullish trend.

What does the ‘head and shoulders’ in the pattern mean?

The pattern received its name of ‘head and shoulders’ because of the three peaks, with the middle peak being the highest and forming a ‘head’, while the two peaks on either side form its ‘shoulders’.

What is the psychology behind the head and shoulders pattern?

The head and shoulders pattern is not just a visual chart pattern; it reflects underlying market psychology and investor sentiment.

The left shoulder forms as a strong uptrend starts to lose momentum, indicating a potential shift.

What does the head and shoulders pattern indicate?

The head and shoulders chart pattern is a well-known and easily identifiable formation in technical analysis. It consists of three peaks, with the middle peak being the highest. This pattern signals a reversal from a bullish to a bearish trend, indicating that an upward price movement is nearing its end.

What does head and shoulders mean?

The head and shoulders pattern is a stock price chart formation signalling a trend reversal from bullish to bearish. It consists of three peaks: a higher peak (head) and two lower peaks (shoulders). This indicates that buying strength is weakening, and a downtrend may begin.

What is the head and shoulder pattern in trading?

The head and shoulder pattern is a technical analysis chart pattern that suggests a potential reversal of a trend. It is characterised by three peaks, with the middle peak (the "head") being the highest and the other two peaks (the "shoulders") being roughly equal in height. A neckline, which is a horizontal line connecting the lows of the shoulders, is also present. When the price breaks below the neckline, it signals a potential bearish trend reversal.

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