Head and shoulders chart pattern

The head and shoulders pattern (also known as head and shoulders top) is a trend reversal chart pattern found after an uptrend or downtrend. There are two types of head and shoulders pattern: a standard head and shoulders pattern and an inverse head and shoulders pattern.

The standard pattern indicates a possible downward move after an uptrend, whilst the inverse head and shoulders pattern signifies a potential upward move after a downtrend. This lesson covers the standard pattern and shows you two ways to use it to look for possible selling opportunities.

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Identifying the standard head and shoulders pattern

The standard head and shoulders pattern is identified by its left shoulder, head, right shoulder and neckline. This pattern appears after an uptrend and signals a possible reversal to the downside.

The price chart below illustrates what the head and shoulders pattern looks like:

Headandshoulders example1

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline

You can practice how to spot the head and shoulders pattern in the following exercises:


Exercise 1: Identify the head and shoulders pattern Show exercise
Exercise 2: Identify the head and shoulders pattern Show exercise

Trading the standard head and shoulders: method one

Once you have identified a head and shoulders pattern in an uptrend and the right shoulder has been completed, you can look to enter a sell order once the price breaks through the neckline. Wait for a candle to close below the neckline before entering the market to avoid a false breakout.

The chart below shows where the sell order should be placed:


Headandshoulders entrymethod1

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
es1 Short entry after the neckline is broken (candle closes below).

The stop loss can be placed above the right shoulder:

Headandshoulders stoplossmethod1

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
es1 Short entry
sl2 Stop loss above the high of the right shoulder.

The take profit level is calculated by measuring the distance between the head and the neckline of the pattern, and then placing the target the same distance from the neckline in the direction of the breakout:


Headandshoulders fullexamplemethod1

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
number_5 Height of head to neckline (red shaded area)
number_6 Same height as the head to the neckline (red shaded area)
es1 Short entry
sl2 Stoploss
tp3 Take profit level – distance between neckline and take profit is the same distance as neckline to the top of the head.

You can practice how to place entry, stop loss and take profit according to method 1 in the following exercise:

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

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Trading the standard head and shoulders: method two

The second way to trade a standard head and shoulders pattern is to wait for the price to break below the neckline (broken support) as in the first example and then look to place a sell order on the retest of the neckline (broken support now becomes resistance).

The chart below demonstrates the second way you can trade the standard head and shoulders pattern:


Headandshoulders entrymethod2

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
number_5 Area where price found resistance at the neckline, (support turned resistance)
es1 Short entry, after the price found resistance at the neckline

The stop loss would go above the new resistance area:

Headandshoulders stoplossmethod2

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
es1 Short entry
sl2 Stop loss, place above the new resistance level.

The profit target would remain the same as in the first method, where you measure the distance of the head to the neckline and then place the profit target the same distance away, down from the neckline.

Headandshoulders method2

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
number_5 Height of the head to the neckline (red shaded area)
number_6 Same height as the distance from the head to the neckline (red shaded area)
es1 Short entry
sl2 Stop loss
tp3 Take profit level

You can practice where to place your entry, stop loss and take profit levels according to method 2 in the following exercise:

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

Summary

In this lesson, you have learned that...

  • … the standard head and shoulders is a bearish reversal pattern that occurs after an uptrend.
  • … you can trade the head and shoulders pattern by waiting for a candle to break through and close below the neckline. The stop loss would go above the right shoulder and the profit target would go the same distance as the head to the neckline, down from the neckline.
  • ... you can also trade the head and shoulders pattern by waiting for the price to break through the neckline and then wait until is retests the neckline as resistance. The stop loss would go above the resistance level and the profit target would be placed the same distance down from the neckline, as the height of the head to the neckline.

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  • there is a mistake in the second point of the summary is: "The stop loss would go above the right shoulder and the stop loss would go the same distance as the head to the neckline, down from the neckline."

    the correct sentence is: The stop loss would go above the right shoulder and the profit taget would go the same distance as the head to the neckline, down from the neckline.
  • Thank you angeljah, this has been fixed.
  • Is there any reason why we set profit target to the height of the head? If the trend is reversed shouldn't we be letting our profits run? I think setting profit to a significant previous low would be a good idea, like in the very last graph using the low right below the orange "1".

    Edit: I just realized that the low roughly coincided with the height of the head... but if it were lower I would consider putting my take profit there.
  • Hi Pockettones,
    If you see there is potential for the trend to go lower you can take partial profits at an obvious area or the 1:1 projection (no. 3) and try to trail the rest of the position lower. The technical setups are the same money management makes the difference. You remember the 'Beat the EA game'? That's a perfect example of the importance and the difference MM makes.
    Regards.
    Peter
  • hey guys i am really thank you for this nice site i read many books and many sites until now and you the best
    i just want to say i notice that head and shoulders in downtrend movement confirm that movement is down , i just wanna ask you about that ?
    thnx again
  • Hi Geroge.nori
    You're welcome, i hope the articles & materials help you become the trader you'd like to be.

    To answer your question i would say head and shoulders pattern once broken signals down move, an inverse head and shoulders pattern once broken signals a potential up move. It is also important where these patterns occur. If they form right into horizontal major levels they provide much stronger signals than when they form in the middle of a larger range. A head and shoulders in a down move is probably a safer pattern to trade than an inverse head and shoulders because the latter would give counter trend signal. (= inverse head and shoulders is safer than a head and shoulders in an uptrend for the same reason). Hope that makes sense, but if not please feel free to ask!
    Regards.
    Peter
  • i think i have little confused
    i take some chart pictures but where can i post them ? and ask about them ?
    and thnx for answer
    i appreciate that
  • Unfortunately you can't post pictures below lessons. To do that you will need to open a thread in the relevant sub-forum such as Technical Analysis. Once you are there you can follow our guide on how to post pictures. smile Not all that difficult!

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