Head and Shoulders — Reversal Signal Explained
The head-and-shoulders pattern marks a possible shift from uptrend to downtrend. How to read the three peaks, the neckline break, and a rough target.
What the pattern is
Head and shoulders is a three-peak formation:
- Left shoulder: the first peak.
- Head: the highest peak, above both shoulders.
- Right shoulder: a third peak, roughly level with the left.
A neckline connects the lows between the peaks. The story it tells: price keeps trying to push higher, but each attempt is weaker, hinting at a turn lower.
The sell signal
The signal completes when price closes below the neckline, ideally on strong volume. A rough target is the neckline minus the height from head to neckline.
For example, with a left shoulder at 74k, head at 76k, right shoulder at 74k and neckline at 73k: the height is 3k, so the projected target is around 70k.
The inverse pattern
An upside-down head and shoulders (at a bottom) is a bullish version — a close above the neckline is the buy signal.
Common mistakes
- Expecting a perfect neckline. In reality it can slope slightly; it does not need to be textbook.
- Acting on a false break. A break below the neckline on thin volume that quickly recovers is unreliable.
- Selling too early. Wait for the neckline break to confirm rather than anticipating it.
Confirmation
A neckline break on high volume is far more convincing than one on low volume. Treat the pattern as raising the odds of a reversal, not guaranteeing one.
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