Head and Shoulders Pattern: Technical Analysis Guide

Master One of the Most Reliable Reversal Patterns in Trading

Understanding the Head and Shoulders Pattern

The Head and Shoulders (H&S) pattern is a reversal chart formation that signals a trend change from bullish to bearish. When inverted, it signals a change from bearish to bullish trends.

This technical analysis pattern consists of:

  • A left shoulder: Initial peak and decline
  • A head: Higher peak than the left shoulder
  • A right shoulder: Lower peak, similar to left shoulder
  • A neckline: Support level connecting the lows

Key Pattern Components

Left Shoulder Formation

Forms during an uptrend as prices rise to a peak and decline moderately. Trading volume is typically high during this formation.

Head Formation

Creates a higher peak than the left shoulder. Volume often decreases during this peak, showing weakening buying pressure.

Right Shoulder Formation

Forms a lower peak, similar to the left shoulder. Volume typically remains lower than during the left shoulder formation.

Neckline

The support line connecting the lows between the shoulders. Can be horizontal or slightly angled.

Pattern Calculator

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Pattern Identification Guide

Volume Characteristics

  • Left Shoulder: High volume during formation
  • Head: Lower volume than left shoulder
  • Right Shoulder: Typically lowest volume of the pattern
  • Breakout: Should show increased volume

Pattern Validation Rules

  • Head must be higher than both shoulders
  • Shoulders should be roughly symmetrical in height
  • Time between shoulders should be relatively symmetrical
  • Neckline should be clearly identifiable

Trading Strategy Guidelines

Entry Points

  • Primary entry: Neckline break with confirmation
  • Conservative entry: Wait for retest of neckline
  • Aggressive entry: Right shoulder peak formation

Stop Loss Placement

  • Conservative: Above right shoulder high
  • Moderate: Above neckline
  • Tight: Above recent swing high

Price Targets

  • Minimum target: Pattern height projected from breakpoint
  • Extended target: 1.618 x pattern height
  • Multiple targets: Scale out positions

Risk Management

Position Sizing Calculator

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