Head and shoulders pattern: how to spot it, confirm it and trade it

The head and shoulders pattern is a reversal pattern with three peaks: a left shoulder, a higher head and a lower right shoulder. A line through the two lows between them, the neckline, marks the trigger. When price closes below the neckline, traders read the uptrend as over and look to sell, with a target equal to the height of the head.

In short

• The pattern has three peaks, the middle one the highest, and a neckline drawn through the two troughs between them.
• It is confirmed only when price closes beyond the neckline. Before that it is a possible pattern, not a signal.
• The measured move is the distance from the head to the neckline, projected from the break. It is a target, not a forecast.
• The inverse head and shoulders is the same shape upside down, at the end of a downtrend, with a buy on a break above the neckline.
• On a $10,000 Direct account, a 67-pip stop on 0.14 lots of GBP/USD risks about $94, under a quarter of the $400 first-day daily loss limit.

What is the head and shoulders pattern?

The head and shoulders pattern is a chart formation that appears after an uptrend. Price makes a high (the left shoulder), pulls back, makes a higher high (the head), pulls back to about the same low, then makes a lower high (the right shoulder) and falls. The failure to make a new high shows buyers weakening.

The line joining the two pullback lows is the neckline. It can be flat or slope up or down. The pattern says nothing until price closes below it, because up to that point the trend can still resume. Many shoulders and heads form and fail.

It belongs to the family of reversal patterns in the Academy chart patterns lesson, alongside double tops and bottoms. The double top pattern guide covers the two-peak version.

What does a head and shoulders look like?

A good example has five features: a prior uptrend, a left shoulder, a head clearly higher than both shoulders, a right shoulder lower than the head, and a neckline through the two lows. The shoulders are roughly level with each other, though they rarely match exactly.

You can check the shape against a short list instead of by eye:

1. There is an uptrend of several swings before the left shoulder. A pattern in a sideways market is weaker.
2. The head is higher than both shoulders by a clear margin, not by a few pips.
3. The right shoulder is lower than the head. If it is higher, the pattern is not a head and shoulders.
4. The two troughs are close in price, or the neckline slopes gently. A steeply sloped neckline gives unreliable targets.
5. The pattern takes time. A tiny formation on a 1-minute chart is mostly noise.

Volume is often said to fall from the left shoulder to the head to the right shoulder. On forex platforms the volume is tick volume, which is a weaker guide, so do not rely on it.

How do you confirm a head and shoulders?

The confirmation is a candle close below the neckline, not a wick through it. A wick that pokes through and closes back above is often a liquidity sweep, the kind covered in the liquidity sweep guide, and it can be a trap.

Some traders add a second filter. They wait for a retest, where price returns to the neckline from below and is rejected. A retest gives a better entry and a closer stop, and it costs the trades that never come back. In a fast move, price often leaves the neckline and does not return.

A break of structure on a lower timeframe is another filter. Under the neckline, the first lower low after the right shoulder shows sellers are in control, as the break of structure guide explains.

How do you trade the head and shoulders pattern?

Sell on a close below the neckline or on a retest of it, put the stop above the right shoulder, and set the target at the measured move. The stop is long, because it sits above the right shoulder, so the position has to be smaller to keep the dollar risk fixed.

The measured move is the vertical distance from the head to the neckline, projected downward from the neckline break. If the head is 120 pips above the neckline, the target is 120 pips below it. The rule is a rule of thumb, and price often stops short of it or goes beyond it, so many traders take part of the position off at 50% to 100% of the distance.

Choices for the stop:

• Above the right shoulder, which gives a long stop and a pattern-invalidating level.
• Above the neckline with a buffer, which gives a short stop and gets hit by a retest.
• Above a lower timeframe swing high after the break, which is in between.

Whichever you choose, set it before the trade and size the position to it.

What is the inverse head and shoulders?

The inverse head and shoulders is the pattern turned upside down. It forms after a downtrend: a left shoulder low, a lower head, a higher right shoulder and a neckline through the two rallies between them. A close above the neckline is the buy signal.

The same rules apply in reverse. The target is the distance from the head to the neckline, projected up from the break. The stop sits below the right shoulder. The inverse version is common at the end of a long fall, and it has the same weakness: many shoulders form and fail before a real reversal.

What does a head and shoulders trade look like with real numbers?

This example is a sell on a 4-hour GBP/USD chart, on a $10,000 Direct account risking 1% per trade, which is $100. One standard lot of GBP/USD is worth $10 a pip. The prices are made up for teaching.

1. After a rise, GBP/USD forms a left shoulder at 1.2750, a head at 1.2820 and a right shoulder at 1.2755. The troughs between them are both at 1.2700, so the neckline is flat at 1.2700.
2. The head is 1.2820 - 1.2700 = 120 pips above the neckline. The measured move is a target of 1.2700 - 0.0120 = 1.2580.
3. A 4-hour candle closes at 1.2695. Sell at 1.2695.
4. The stop goes at 1.2762, 7 pips above the right shoulder. The risk is 67 pips.
5. Size: $100 / (67 x $10) = 0.149 lots, rounded down to 0.14. A pip is $1.40, so the risk is 67 x $1.40 = $93.80.
6. The target at 1.2580 is 115 pips away, worth 115 x $1.40 = $161, a ratio of 1.7 to 1.

If a 4-hour candle closes back above 1.2700 and then above the right shoulder, the pattern has failed, and the stop does its job. If price falls 60 pips and returns to 1.2700, consider taking part of the trade off, because retests of a broken neckline are common. Simulated trades carry costs like a live account: a commission when a trade opens and closes, and holding costs on positions kept overnight, which matters for a pattern that takes days to play out.

How this works on CMC Funded

On a $10,000 Direct account the daily loss limit is 4% of the day's starting equity, which is $400 on the first day, and the maximum loss is a fixed 6%, so the floor is $9,400. The limit is measured on equity, so open trades count at every price. Reaching either ends the account.

The long stop is the reason size matters. At 0.14 lots, a 67-pip stop costs $93.80. If you ignore the stop distance and trade 0.50 lots, the same stop costs $335, which is 84% of the daily limit in one trade. A pattern with a long stop is a small-size trade, and it earns less per pip than the same setup on a tight stop.

The Direct profit target is 10%, which is $1,000 on $10,000, with at least 3 trading days and no time limit. Holding overnight and over the weekend is allowed, with holding costs, so a 4-hour pattern can be left to play out. On the Classic route the daily limit is 5% and the maximum loss 10%. Read the rules for the exact definitions, and use the position size calculator for the lots.

Is the head and shoulders pattern reliable?

There is no single reliable figure. Published studies of chart patterns give mixed results, and patterns are judged by eye, so two traders see different shapes on one chart. Treat the pattern as a way to define an entry, a stop and a target, not as a forecast.

Hindsight flatters the pattern. Looking back, every head and shoulders that worked is easy to pick out, and the many that failed or never reached the neckline are forgotten. To test it, write down your rules for the shoulders and the neckline, mark 30 examples on one pair and record how many reached the measured move. The trading journal template guide shows what to log.

Common mistakes

• Selling the right shoulder before the neckline breaks. The pattern is not complete, and price may make a new high.
• Counting a wick through the neckline. Wait for a close.
• Using a pattern with no trend before it. A head and shoulders in a range is only a small bump.
• Forgetting the long stop. The stop above the right shoulder is far away, so the position must be small.
• Expecting the full measured move. Price often stops short, so decide where to take part of the profit.
• Redrawing the neckline to fit. A neckline you can move always finds a break.
• Ignoring the higher timeframe. A head and shoulders against a strong weekly uptrend is often just a pullback.

Questions traders ask

How accurate is the head and shoulders pattern?

No reliable accuracy figure exists, because the pattern is drawn by eye. Many examples fail before the neckline breaks. Your own records of a fixed rule will tell you more than a published number.

What is the target for a head and shoulders?

The usual target is the distance from the head to the neckline, projected from the neckline break. For a head 120 pips above the neckline, the target is 120 pips below it. Treat it as a guide.

Can the neckline slope?

Yes. A neckline can slope up or down, and the break is still a close beyond the line. A steep slope makes the measured move less reliable, because the distance depends on where you measure.

What is the difference between head and shoulders and a double top?

A double top has two peaks and no head. The head and shoulders has three, with the middle one highest. Both are reversal patterns and both are confirmed by a break of the level between the peaks.

Next steps

The Academy chart patterns lesson shows flags, double tops and head and shoulders with measured moves. Read the bear flag pattern guide for a continuation pattern that often follows a neckline break, and the price action trading guide for reading the candles around it. Size each entry with the position size calculator, and read the loss limits on the rules page.

You can compare the Classic and Direct routes on the challenges page.