Head and Shoulders Pattern

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Head and Shoulders Pattern
Last modified: May 7, 2021
Estimated reading time: 2 min

Theย head and shoulders chart patternย is a reversal pattern and most often seen inย uptrends.

Not only is โ€œhead and shouldersโ€ known for trend reversals, but itโ€™s also known for dandruff reversals as well.ย ๐Ÿ˜‚

In this lesson, weโ€™ll stick to talking about trend reversals and leave the topic of dandruff for another time.

Head and Shoulders

A head and shoulders pattern is also a trend reversal formation.

It is formed by aย peakย (shoulder), followed by aย higher peakย (head), and then anotherย lower peakย (shoulder).

A โ€œnecklineโ€ is drawn by connecting the lowest points of the two troughs.

The slope of this line can either be up or down. Typically, when the slope is down, it produces a more reliable signal.

grade7-head-and-shoulders-before

In this example, we can easily see the head and shoulders pattern.

The head is the second peak and is the highest point in the pattern. The two shoulders also form peaks but do not exceed the height of the head.

With this formation, we put an entry order below the neckline.

We can also calculate a target by measuring the high point of the head to the neckline.

This distance is approximately how far the price will move after it breaks the neckline.

You can see that once the price goes below the neckline it makes a move that is at least the size of the distance between the head and the neckline.

We know youโ€™re thinking to yourself, โ€œthe price kept moving even after it reached the target.โ€

And our response is, โ€œDONโ€™T BE GREEDY!โ€

Inverse Head and Shoulders

The name speaks for itself. It is basically a head and shoulders formation, except this time itโ€™sย upside down.ย ๐Ÿ™ƒ

Aย valleyย is formed (shoulder), followed by an evenย lower valleyย (head), and then anotherย higher valleyย (shoulder).

These formations occur after extended downward movements.

Here you can see that this is just like a head and shoulders pattern, but itโ€™s flipped upside down.

With this formation, we would place a long entry order above the neckline. Our target is calculated just like the head and shoulders pattern.

Measure theย distance between the head and the neckline, and that is approximately the distance that the price will move after it breaks the neckline.

grade7-inverse-head-and-shoulders-after

You can see that the price moved up nicely after it broke the neckline.

If your target is hit, then be happy with your profits.

However, there are trade management techniques where you can lock in some of your profits and still keep your trade open in case the price continues to move your way.

You will learn about those later on in the course.


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