Head And Shoulders Pattern
The head and shoulders pattern is a powerful trend reversal formation that helps traders identify potential market turning points with high accuracy.
Pattern Formation​
The pattern consists of three distinct peaks:
- A central peak (the "head")
- Two lower peaks (the "shoulders")
- A connecting support/resistance line (the "neckline")
Pattern Types​
Classic Head and Shoulders​
A bearish reversal pattern forming in uptrends:
- Forms after an established uptrend
- Head peak higher than shoulder peaks
- Neckline connects the reaction lows
- Breakout occurs downward through neckline
Inverse Head and Shoulders​
A bullish reversal pattern forming in downtrends:
- Forms after an established downtrend
- Head trough lower than shoulder troughs
- Neckline connects the reaction highs
- Breakout occurs upward through neckline
Key Components​
1. Pattern Structure​
- Left Shoulder: Initial peak/trough formation
- Head: Central, most extreme price point
- Right Shoulder: Final peak/trough
- Neckline: Trendline connecting reaction points
2. Volume Analysis​
Volume characteristics enhance pattern reliability:
- Decreasing volume during pattern formation
- Volume surge on neckline breakout
- Higher volume on left shoulder vs right shoulder
3. Breakout Confirmation​
Reliable breakouts show:
- Clear neckline breach
- Strong volume confirmation
- Potential retest of neckline
Trading Strategy​
Entry Points​
-
Conservative Entry:
- Wait for neckline breakout
- Confirm with volume surge
- Enter on first retest
-
Aggressive Entry:
- Enter on right shoulder formation
- Place stop above/below head
- Add on neckline break
Target Projection​
Calculate price targets using:
- Measure head to neckline distance
- Project equal distance from breakout point
- Use Fibonacci extensions for additional targets
Pro Tip
Combine with Trend Bars Pro for enhanced breakout confirmation and trend direction validation.