What is Head and Shoulders?

The head and shoulders pattern forms in five phases: (1) left shoulder — price rises to a peak and declines, (2) head — price rises to a higher peak and declines, (3) right shoulder — price rises again but fails to reach the head's height, (4) neckline break — price falls below the line connecting the two troughs between the peaks, and (5) confirmation — price continues below the neckline, often retesting it as resistance.

The neckline is the critical level. It connects the low point after the left shoulder with the low point after the head. The pattern is not confirmed until price breaks below the neckline with convincing volume. The measured move target is the distance from the head to the neckline, projected downward from the neckline break point.

The inverse head and shoulders is the bullish counterpart, forming at the end of downtrends. It has three troughs with the middle trough being the deepest. A break above the neckline signals a potential reversal to the upside. Both patterns are among the most researched and historically reliable chart formations.

Volume characteristics help confirm the pattern. Ideally, volume is highest on the left shoulder, lower on the head, and lowest on the right shoulder, showing decreasing buying interest. Volume should then expand on the neckline break. A neckline break on low volume is more likely to produce a false breakdown.