Head and shoulders
bearish · reversal pattern · also: H&S
The head-and-shoulders pattern is a bearish reversal formation that appears after an extended uptrend. It consists of three peaks: a left shoulder, a higher central peak (the head), and a right shoulder approximately the same height as the left. A horizontal or downward-sloping neckline connects the two reaction lows; a confirmed breakdown of the neckline on volume signals trend reversal.
Formation rules
- Prior trend is up — H&S only counts as a reversal
- Three peaks: shoulder, head (highest), shoulder
- Right shoulder forms on lower volume than the head
- Neckline connects the two intervening lows
- Pattern completes only on a close below the neckline
- Optional: minimum-target = neckline − height of head
How to trade it
Conservative traders wait for a confirmed close below the neckline before entering short. Aggressive traders sell the right shoulder on lower-volume rallies, using a stop above the head. The classic measured-move target is the height of the head projected below the neckline. In a strong primary uptrend, head-and-shoulders frequently fails — many professional discretionary traders therefore require an additional momentum or volume divergence before sizing a counter-trend position.
Common pitfalls
- Confirmation bias: traders see H&S where it doesn't exist after the fact
- Strong trends ignore the pattern entirely
- Low-volume right shoulder is required — without it, statistical edge collapses
- Pattern measured on closes, not intraday wicks
Statistical context
Bulkowski's "Encyclopedia of Chart Patterns" (2nd ed., 2005) reports a 67% reversal rate for head-and-shoulders tops with valid volume profile, and a meaningful drop in success rate without volume confirmation. Note: backtest results vary widely by market and timeframe; treat textbook stats as priors, not ground truth.
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