Head and shoulders

Head and shoulders is bearish reversal chart pattern. It finishes uptrend move and starts downtrend move.

head and shoulders bearish chart pattern

Left shoulder and Head are created during uptrend. Price retraces all the way down from the top of pattern, it means 100% retracement of head uptrend move. This is first warning sign. It shows that uptrend become weak.

Then the right shoulder is forming. A lot of supply is available from previous buyers in head uptrend and create lower high = the right shoulder. This is last warning sign that uptrend finished.

Trading rules

Basic entry rule for trade based on this stock chart pattern is to enter short trade immediately after breakdown of neckline. You have to set stop loss above neckline and as all breakout strategies is little bit risky.

Aggressive type of entry is based on timing during creation of right shoulder. If you see volume confirmation and price stops around highs of left shoulder, you can enter short trade.

Last version is more conservative and it expect that you will wait for pullback which has to happen after breakdown of neckline. Then you will enter short trade based on horizontal price resistance of neckline and downtrend line connecting head and right shoulder.

This type of trade setup is described on this picture:

Alternative head and shoulders short trade entry

Stop loss level for every trade has to be set accordingly. It could be placed above right shoulder or head for situation that trade setup based on this pattern will fail.

stop loss level for head and shoulder trade setup

Typical target for such trade is value, which is lower in the same distance from neckline as is top of head above neckline.

You have also consider time frame for possible trade based on this stock chart pattern. If you find it on 5 minute chart then you can expect that target could be achieved within several hours the same day. If you see this pattern on daily chart then you have to be in trade for several days before achieving the target value.

Inverse head and shoulders pattern

This is bullish version of this chart pattern. The same rules work for this version as for bearish version above.

Bullish Inverse head and shoulders pattern

! My head and shoulder chart pattern tip !

Watch the volume.
It has to be lower during rally in right shoulder then in previous rallies during head and left shoulder.

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