Head and Shoulders

A bearish reversal pattern consisting of three peaks — a higher central peak (the head) flanked by two lower peaks (the shoulders) — signaling a potential trend change from bullish to bearish.

The head and shoulders pattern is one of the most widely recognized and studied patterns in technical analysis. It forms after a sustained uptrend: price makes a new high (the left shoulder), pulls back, makes an even higher high (the head), pulls back again to a similar level as the first pullback (the neckline), makes a lower high (the right shoulder), and then breaks below the neckline — completing the pattern and triggering the sell signal.

The neckline connects the two reaction lows between the shoulders and the head. It can be horizontal or slightly sloped. The pattern is only confirmed — and the short trade triggered — when price closes decisively below the neckline, preferably on elevated volume. The conventional price target is derived by measuring the distance from the neckline to the top of the head and projecting that distance downward from the neckline breakout point.

Head and shoulders patterns can take weeks to months to form on daily charts and represent a genuine shift in supply/demand dynamics as the pattern evolves. The right shoulder's inability to reach the head's high signals exhaustion of buying pressure. Failed head and shoulders patterns — where price breaks the neckline then reverses back above it — can trigger sharp short-covering rallies and are traps for bears.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.