A head and shoulders pattern is a reversal made of three peaks: a left shoulder, a higher head and a lower right shoulder, all sitting on a support line called the neckline. It is confirmed only when price closes below that neckline. The inverse version, three troughs with the middle one lowest, marks a possible end to a downtrend.
Quick answer: what is a head and shoulders pattern?
It is a three-peak reversal pattern. Price makes a high (left shoulder), a higher high (head), then a lower high (right shoulder), with pullbacks to a common neckline between them. A close below the neckline confirms it. The stop usually goes above the right shoulder, and the inverse pattern works the same way at a low.
The structure behind the pattern
The names describe a shape, but the reason traders watch it is structure. An uptrend makes higher highs and higher lows; our guide on how to identify market structure with highs, lows and breaks explains which swings count.
- Left shoulder and head: still a normal uptrend, with a higher high.
- Pullback after the head: it falls back to around the previous swing low, which is the first warning.
- Right shoulder: the rally fails below the head, giving the first lower high.
- Neckline break: price closes below the swing lows, making the first lower low. Only now has the structure turned.
Until step 4, the market may simply be pausing within an uptrend. That is why we do not sell the right shoulder on its shape alone.
How to draw the neckline
Join the low of the pullback after the left shoulder to the low of the pullback after the head. Where those swings have long wicks, we mark a narrow zone rather than a single line, using the nearest closes as the inner edge.
Flat, rising or falling necklines
The neckline does not have to be horizontal. A rising neckline in a top means the second pullback held higher, so the break comes later and from a higher price. A falling neckline means sellers were already gaining ground, which some traders read as a weaker structure, but the break comes lower and later. Whatever the slope, draw it before the break, not afterwards to fit the move.
Confirmation, entry and stop
We want a candle body to close beyond the neckline on our trading timeframe. Wicks through it often only clear stop orders sitting under the obvious swing lows, then price recovers. Once the break is confirmed, there are two common entries.
- On the break close: you are in, but the stop is wide and the entry is already some way from the right shoulder.
- On the retest: price returns to the broken neckline and is rejected, as in our breakout and retest strategy for entries after a break. The entry is better, but many retests never come.
The standard stop sits above the right shoulder plus a buffer for the spread. If price makes a new high above it, the lower high has gone and the pattern is no longer a head and shoulders. Our guide on where to place a stop loss with price action covers buffers.
Targets and the measured move
The classic target measures the distance from the head to the neckline and projects it from the break point. This is a chart-book convention, not a promise. We check it against the next support zone and use whichever comes first, and we skip trades where that target is less than twice the stop distance.
| Element | Head and shoulders | Inverse head and shoulders |
|---|---|---|
| Comes after | An uptrend | A downtrend |
| Key structure | First lower high, then lower low | First higher low, then higher high |
| Confirmation | Close below the neckline | Close above the neckline |
| Standard stop | Above the right shoulder | Below the right shoulder |
| Measured move | Head to neckline, projected down | Head to neckline, projected up |
| Failure | Close back above the neckline | Close back below the neckline |
The inverse pattern
The inverse head and shoulders appears at the end of a decline: a low, a lower low, then a higher low, before price closes above the neckline. That higher low followed by a higher high is often the first sign of a new trend, which our guide on how to spot the start of a new trend with price action covers in more depth.
Worked example: an inverse head and shoulders
Example, using hypothetical figures on a £5,000 account where we risk 1% per trade, or £50. A hypothetical currency pair has fallen for a month into a daily support zone near 1.2400.
It makes a left shoulder low at 1.2450, a head at 1.2380 and a right shoulder at 1.2440. The bounces between them topped at 1.2560 and 1.2570, so the neckline runs roughly flat through 1.2565. A 4-hour candle closes at 1.2580, above it, and we buy that close.
- Stop: 1.2425, below the right shoulder with a buffer, so 155 pips of risk.
- Size: £50 ÷ 155 pips = about £0.32 per pip on a spread bet.
- Measured move: 1.2565 minus 1.2380 is 185 pips, a guide of about 1.2750.
- Next resistance: a zone at 1.2900, beyond the guide, so 1.2750 is the first target.
That target is 170 pips away against 155 pips of risk, short of our two-to-one filter, so we would pass on the break and wait for a retest. Our guide on how to calculate position size for spread bets and CFDs shows the sizing. Spread bets are leveraged, so a gap through the stop can cost more than the planned £50.
Common mistakes and what the evidence says
- Selling the right shoulder. Until the neckline breaks, the uptrend is intact.
- Redrawing the neckline. A line moved after the fact always looks like it worked.
- Ignoring the location. A pattern in the middle of a range, far from any level, carries little meaning.
- Treating the measured move as certain. It is a rough guide.
- Staying in after a failure. A close back above the neckline is a warning; a move above the right shoulder ends the trade.
On the evidence, a Federal Reserve Bank of New York staff report by Osler and Chang tested a head-and-shoulders trading rule on daily exchange rates from 1973 to 1994, identifying patterns by algorithm and comparing profits with 10,000 simulated random-walk series. In the version published in the Economic Journal in 1999, the authors concluded the rule was profitable but dominated by simpler trading rules. That is a long way from a reliable signal, which is why location and risk control matter more than the shape.
Frequently asked questions
Is a head and shoulders pattern bullish or bearish?
The standard version is bearish because it forms after an uptrend and breaks support. The inverse version is bullish. Neither means anything until the neckline breaks.
What is the difference between a head and shoulders and a double top?
A double top has two highs at about the same level, while a head and shoulders has three with a higher middle peak. Our guide to the double top and double bottom patterns covers the two-peak version.
Can you enter in the right shoulder before the break?
Some traders do, for a tighter stop and better reward. It is a bet that the neckline will break, so it fails more often, and we keep it for strong locations only.
How often does the head and shoulders pattern work?
We have found no independent, verifiable success rate, so we do not quote one. Test fixed rules on your own forward results before trusting it.
Next steps
Our guide to ranking the key levels that count shows how to judge whether a pattern has formed in the right place.
Discovering the beginning of new trends and a filters and trigger process are part of our price action trading course, and the basics section is free to start.
This article is for education only and is not financial advice. Trading leveraged products such as CFDs and spread bets carries a high risk of losing money.
