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Head And Shoulders Chart Pattern

Patrick Stockdale
Written by Patrick Stockdale | May 24, 2022

What Is A Head And Shoulders Pattern?

In technical analysis, a head and shoulders pattern, also known as a "head and shoulders top", is a bearish chart formation on the price charts of financial markets. It is shaped like the outline of a head and two shoulders and it predicts that the price of a market may turn bearish and decline to lower prices.

Traders use a head and shoulders pattern as a bearish signal and look to short the market when the head and shoulders pattern breaks below the neckline.

Head And Shoulders Pattern Components

Head & Shoulder Pattern Components

In order for a head and shoulder pattern to form on a price chart, there needs to be certain components visible on a price chart of a market.

The components of a head and shoulders chart pattern are:

  • The left shoulder: This is the left-hand side of the head and shoulders pattern and is shaped like a shoulder. It is typically a low swing high on a price chart.
  • The head: This is the center of the head and shoulders pattern and is shaped like a head. It is a higher swing high than the left and right shoulders on a price chart.
  • The right shoulder: This is the right-hand side of the head and shoulders pattern and is shaped like a shoulder. It is a lower swing high than the head on a price chart.
  • The neckline: This is the base of the head and shoulder price chart i.e. the support level. It is where a trader will enter a short position once the chart pattern is completed.

These components combined make up a head and shoulders pattern.

Without one of these components, the head and shoulders pattern is not complete.

Head And Shoulder Chart Pattern Examples

Below are visual examples of head and shoulder chart patterns on the price charts of various markets.

Example Of A Head And Shoulders Chart Pattern In Stocks

Example Of A Head And Shoulders Chart Pattern In Stocks

In the above price chart, there is an example of a head and shoulders pattern in Amazon stock.

After the price of Amazon stock breaks below the neckline, a short trade is alerted and the price of the market started a bearish price trend where the price falls to much lower price levels.

This is an example of a head and shoulders pattern in the stock market.

‍Example Of A Head And Shoulders Pattern In Forex

Head & Shoulders Pattern In Forex Market

In the above price chart, there is an example of a head and shoulders pattern in the EUR/USD currency pair.

‍This pattern signaled the beginning of a bearish price trend in the currency for many months with a very large price decline.

Example Of A Head And Shoulders Pattern On A Shorter Timeframe Price Chart

Example Of A Head And Shoulders Pattern On A Shorter Timeframe Price Chart

In the above 5-minute price chart, a head and shoulders pattern formed.

It signaled the beginning of a bearish price trend over the next few hours.

This is an example of a shorter-term head and shoulders pattern.

Example Of A Head And Shoulders Pattern On A Longer Timeframe Price Chart

Example Of A Head And Shoulders Pattern On A Longer Timeframe Price Chart

In the above price chart example, a head and shoulders chart pattern formed on the weekly chart.

It signals the beginning of a multi-month bearish price trend where the price of the market declined to much lower levels.

This is an example of a longer-term head and shoulder pattern.

Head And Shoulders Pattern Timeframes

A head and shoulder chart pattern can form on any timeframe price charts.

Short-term scalpers will trade head and shoulders patterns that form on the 1-minute price charts.

Day traders will trade head and shoulders patterns that form on the 5-minute to hourly price charts.

Swing traders will trade the head and shoulders patterns that form on the daily price charts.

Long-term traders will trade the head and shoulders patterns that form on the weekly price charts.

How To Find A Head And Shoulders Chart Pattern

There are a number of methods a trader or technical analyst use to find head and shoulders chart patterns.

The methods to find head and shoulders chart patterns are:

  • Manually browse the price charts: A trader can manually browse through the price charts of markets to try and find head and shoulder patterns. This is time-consuming but it will help a new trader to learn.
  • Use a chart pattern scanner: A chart pattern scanner can help find head and shoulder patterns forming. This is much faster and the software will automatically scan for head and shoulders in every market around the world.

These are the two methods for finding head and shoulders chart patterns.

Head And Shoulders Pattern Benefits

The benefits of head and shoulder chart patterns are:

  • Provides logic and understanding of the price action: A head and shoulders pattern can help traders understand the price action in a market and provide logic as to what is occurring.
  • Can help identify when a bullish trend is ending: A head and shoulders pattern can help traders take profit on their buy trades and identify when a bullish trend is ending.
  • Can help capture large bearish price moves: A head and shoulders pattern can signal the beginning of a large bearish price trend.
  • Can be applied in any financial market: Head and shoulders patterns can be found in any market and are not limited to just a few.
  • Can be used in any timeframe: The head and shoulder pattern can be traded on any timeframe meaning any type of trader from day traders to swing traders can use it.

These are the main benefits of using head and shoulder patterns as part of a trading strategy.

Head And Shoulders Pattern Limitations

The limitations of head and shoulder patterns are:

  • They can create many false breakouts: A head and shoulders pattern can penetrate the neckline on multiple occasions and fail. This is known as a failed head and shoulders pattern and it indicates that the price failed to move lower.
  • The risk-reward ratio is not always great: In some instances, the risk-reward ratio may not be great, especially if there is a large distance between the swing high of the right shoulder and the neckline.

These are the main limitations with head and shoulders patterns that new traders should be aware of.

Frequently Asked Questions About Head And Shoulders Chart Patterns

Below are frequently asked questions about the head and shoulders chart pattern.

Is A Head And Shoulders Pattern Bullish?

No, a head and shoulders pattern is a bearish signal that indicates that the price of a market may decline lower.

What's The Difference Between A Head And Shoulders Pattern And An Inverse Head And Shoulders Pattern?

A head and shoulders pattern is a bearish signal whereas an inverse head and shoulders pattern is a bullish signal in the market.