The head and shoulders pattern is a classic chart pattern signaling a bullish-to-bearish reversal. Recognized for its reliability, it consists of three peaks: the left shoulder, head, and right shoulder, connected by a neckline.
Key Takeaways
- Trend Reversal Indicator: Signals a shift from bullish to bearish momentum.
- Structure: Left shoulder → Higher peak (head) → Right shoulder (lower/equal to left shoulder).
- Confirmation: Validated when price breaks below the neckline with increased volume.
Anatomy of the Head and Shoulders Pattern
1. Left Shoulder
- Forms after a bullish uptrend.
- Price rises to a peak, then retraces to a trough.
2. Head
- Price rallies to a higher peak than the left shoulder.
- Declines again, forming the "head."
3. Right Shoulder
- Price rises but fails to surpass the head’s height.
- Often matches or is lower than the left shoulder.
4. Neckline
- Connects the troughs of the left/right shoulders.
- Break below this line confirms the pattern.
Trading Strategy
Entry Points
- Aggressive Approach: Short at the right shoulder’s rejection (stop loss above the shoulder).
- Conservative Approach: Wait for neckline break (stop loss above right shoulder).
Volume Signals
- Ideal Scenario: Higher volume on left shoulder → Lower volume on head → Spike in volume at neckline break.
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Common Pitfalls
Fakeouts
- Right shoulder may briefly exceed the left, creating false signals.
- Solution: Wait for confirmed neckline break before entering trades.
Failed Patterns
- Price may retest the neckline as resistance before continuing downward.
- Risk Management: Always use stop-loss orders.
Real-World Examples
Daily Chart Example ($ASNA)
- Showed two H&S patterns, with the second leading to a falling wedge continuation.
Intraday Example (5-minute NVDA chart)
- Ascending triangle → Bull flag (left shoulder) → Rising wedge (head) → Bear flag (right shoulder).
FAQs
Q: How reliable is this pattern?
A: 85% accuracy rate when confirmed by neckline break and volume.
Q: Is it always bearish?
A: Yes, but failures occur—manage risk with stop-loss orders.
Q: What’s the "rule" for trading it?
A: Enter short on neckline break; stop loss above the right shoulder.
Q: Can the right shoulder be higher?
A: Rarely—this is a fakeout. Wait for confirmation.
Final Thoughts
The head and shoulders pattern is a powerful tool for identifying reversals. Combine it with:
- Volume analysis.
- Candlestick confirmation (e.g., bearish engulfing).
- Support/resistance levels.
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Remember: Never trade a partial pattern—wait for the neckline break!