Head and shoulders

What it is

A head and shoulders is a reversal pattern that appears after an uptrend. It has three peaks: a left shoulder, a higher head, and a right shoulder that is lower than the head. The lows between the peaks connect to form the neckline. The pattern completes when price closes below that neckline.

Why it forms

In an uptrend each rally makes a higher high. The head is the last time buyers manage that. On the next rally — the right shoulder — they run out of fresh demand before reaching the old high. That lower high is the first visible sign that sellers are absorbing the buying.

The neckline is where dip-buyers stepped in twice. When price closes below it, those buyers are now holding losses, and some sell to get out. That extra supply is why breaks of a well-watched neckline often move quickly.

How to identify it

• A clear uptrend before the pattern. Without one, there is nothing to reverse.
• Three distinct peaks, with the middle one clearly the highest.
• Shoulders of roughly similar height and width. They do not need to match exactly.
• A neckline drawn through the two lows between the peaks. It can be flat or slightly sloped.
• Volume often lighter on the right shoulder than on the left shoulder or head.

What confirms it

A candle close below the neckline. Intraday wicks through the line are not enough. Rising volume on the break adds weight, because it shows real selling, not just an absence of buyers. Some traders also wait for a retest: price returns to the underside of the neckline and fails to reclaim it.

What invalidates it

• Price never closes below the neckline and instead breaks above the right shoulder.
• After a break, price moves back above the neckline and holds there.
• A rally that exceeds the right shoulder high — the lower-high structure is gone.

Common mistakes

• Acting on the right shoulder. The shape is not a signal until the neckline breaks.
• Seeing it everywhere. Any three bumps are not a head and shoulders. It needs a prior uptrend and a clear head.
• Treating the measured move as a target price. It is a reference for scale. Markets can stop short or overshoot.
• Ignoring the timeframe. A pattern on a 5-minute chart carries much less weight than one on a daily chart.