Head and shoulders

The head and shoulders is the most famous reversal pattern — a signal that an uptrend may be ending.

The shape

Three peaks: a left shoulder, a higher head, then a right shoulder roughly level with the left. A line connecting the two lows between the peaks is the neckline.

The pattern completes when price breaks below the neckline after the right shoulder. That break is the signal; the peaks alone are only a setup.

How traders trade it

• Entry — on the neckline break, ideally with a rise in volume.
• Stop — above the right shoulder.
• Target — measure the height from the head to the neckline and project that distance down from the break.

The inverse

An inverse head and shoulders is the same shape flipped upside down at the bottom of a downtrend, signalling a possible bullish reversal — the neckline break is upward.

The limitation

Head and shoulders fail regularly. A neckline break can be a false break that reverses straight back. The pattern is also subjective — analysts will draw different necklines on the same chart. Wait for the close beyond the neckline, prefer confirmation from volume, and always use the stop; the measured target is a guide, not a guarantee.