What is a Head and Shoulders Pattern?
Head and Shoulders
Forex Trading Glossary
Quick Answer: Head and shoulders is a reversal chart pattern with three peaks - a higher peak (head) between two lower peaks (shoulders). It signals trend reversal when the neckline breaks.
What is a Head and Shoulders Pattern?
The head and shoulders pattern is a reversal formation marked by three peaks: a higher middle peak (the head) between two lower peaks (the shoulders). A neckline connects the interim lows and acts as the trigger line.
Key Components
- Left shoulder: A rally followed by a pullback that sets the first neckline pivot.
- Head: A higher high that fails to attract follow-through buying.
- Right shoulder: A lower high that shows buyers are running out of strength.
- Neckline: Support connecting the two swing lows; a break signals confirmation.
Measuring the Target
Measure the distance from the neckline to the head's peak. Project that distance from the neckline break to estimate the minimum move, then adapt the target to higher timeframe levels.
Trading Guidelines
- Wait for a decisive close below the neckline (or above it in an inverse pattern) before entering.
- Check volume or momentum oscillators for confirmation of waning demand.
- Hide stop losses above the right shoulder to invalidate the pattern if price recovers.
- Scale out at interim support levels and trail the remainder in case the reversal accelerates.
Related Terms
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