Head and Shoulders and Inverse H&S
A Head and Shoulders is a bearish reversal pattern with a highest peak in the middle, flanked by two lower peaks; an inverse H&S is the bullish mirror image of the same structure, forming at bottoms.
On the chart above, you see three points: the highest point in the middle is the ‘HEAD’, flanked by the ‘LEFT SHOULDER’ and ‘RIGHT SHOULDER’ (labels appear on a wide screen). The dashed line passing below the shoulders is the ‘NECKLINE’. If the pattern is red, it's a classic Head and Shoulders and is bearish; if it's green, it's an inverse Head and Shoulders and is bullish.
A classic H&S forms at the end of an uptrend. The price makes a peak (left shoulder), pulls back, then makes a higher peak (head). Up to this point, everything looks like a continuation of the uptrend. But on the third attempt, the price fails to reach the head's level and turns down at a lower peak (right shoulder). Buyers are no longer able to push to old highs. An inverse H&S is its mirror image: three bottoms form at the end of a downtrend, the middle one is the deepest, and the last bottom remains shallower; sellers are exhausted.
As with the double top, the crucial moment of the pattern is the neckline. Seeing three peaks is not enough; until the price closes below the neckline, the H&S is only a possibility. The neckline is not always horizontal; it can be slightly sloped. An upward-sloping neckline indicates that the right shoulder remained relatively strong; a downward-sloping neckline indicates that weakness started early.
On the right, the ‘TARGET’ and ‘STOP’ levels are displayed. The target is found by projecting the height between the head and the neckline downwards (upwards in an inverse H&S) from the breakout point. The stop is slightly beyond the right shoulder: if the price returns there, the structure is invalidated.
The most important detail to look at in an H&S is the right shoulder. If the right shoulder is significantly lower than the left shoulder and trading volume decreases during its formation, it more clearly indicates that the uptrend is losing strength. If the right shoulder is almost equal to the head, the pattern is weak; this could also signal an attempt at a new high.
How to read it
- Find the three peaks (or three bottoms in an inverse H&S) in order: the middle one should be the highest, and the right shoulder should be significantly behind it.
- Draw the neckline by connecting the two pullback points between the shoulders; it can be slightly sloped.
- Wait for the neckline to break with a close, then measure the target with the head–neckline height.
- Place the stop beyond the right shoulder; if the price goes past the right shoulder, forget the pattern.
Trap
Not every three peaks on a chart constitute an H&S. Three random peaks in a horizontal band can also look like a left shoulder–head–right shoulder. The main condition is that this structure appears at the END of a clear trend: if there is no uptrend to reverse, there is no reversal pattern. The second trap is taking a position before the neckline breaks; after the right shoulder, the price can rise again and surpass the head, at which point the pattern becomes completely invalid.
Tip
On the pattern card, look at the distinction between 'possible' and 'confirmed'. A possible H&S is valuable as a warning: if you have an open position, it might be a reason to tighten your stop. However, leave the decision to open a new position until the neckline breaks.
Glossary
- Head and Shoulders (H&S)
- A bearish reversal pattern with a highest peak in the middle, flanked by two lower peaks.
- Inverse H&S
- A bullish mirror image pattern forming at bottoms, where the middle bottom is the deepest.
- Right shoulder
- The last peak of the pattern; its failure to reach the head indicates weakening buyers.
- Sloped neckline
- A neckline that is not perfectly horizontal; its slope provides clues about the strength of the structure.
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