# Understanding the Head and Shoulders Pattern in Technical Analysis

## What Is the Head and Shoulders Pattern?

The head and shoulders pattern in [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp) signifies a potential reversal from a bullish to a bearish trend. This formation is characterized by three peaks: the central peak, referred to as the "head," and two flanking peaks of similar height, known as the "shoulders." As the pattern develops, a stock's price climbs to a peak, drops back to its prior base, advances to a higher peak (the 'head'), and then retreats once more before reaching a final peak at the initial shoulder level. This structure signals that an upward trend might be ending.  

### Key Takeaways

*   The head and shoulders pattern is a key indicator in technical analysis, signaling a potential reversal from a bullish to a bearish trend through a series of three peaks.
*   An inverse head and shoulders pattern, often called a head and shoulders bottom, suggests a reversal from a bearish to a bullish trend, formed by three troughs.
*   This chart pattern is widely regarded as a reliable signal by traders, although like all indicators, it's not infallible and should be used as part of a broader [trading strategy](https://www.investopedia.com/articles/active-trading/11/four-types-of-active-traders.asp).
*   Entry and exit points for trading this pattern typically revolve around the neckline, with profit targets based on the pattern's height from breakout points.
*   Despite its reliability, the pattern's signals might lead to significant stop losses and risk-to-reward situations that need careful management.

![Head and Shoulders Pattern](https://www.investopedia.com/thmb/F1ZLsjzVB67INrJ_mj0Ghytr9Mw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/head-shoulders-FINAL-08d3bb8f573d4898a371dcf3371b0ecb.jpg)

*— Investopedia / Jiaqi Zhou*

## Breaking Down the Head and Shoulders Chart Pattern

A head and shoulders pattern has four components:

1.  After long bullish trends, the price rises to a peak and subsequently declines to form a trough.
2.  The price rises again to form a second high substantially above the initial peak and declines again.
3.  The price rises a third time, but only to the first peak level, before declining again.
4.  The neckline, drawn at the two troughs or peaks (inverse).

The first and third peaks are the shoulders, and the second peak forms the head. The line connecting the first and second troughs is called the [neckline](https://www.investopedia.com/terms/n/neckline.asp).

![Image](https://www.investopedia.com/thmb/-06wyWh1tc1Vz9t7j-DIYyZM_0c=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Head_And_Shoulders_Pattern_Sep_2020-01-4c225a762427464699e42461088c1e86.jpg)

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### Exploring the Inverse Head and Shoulders Pattern

The opposite of a head and shoulders chart is the [inverse head and shoulders](https://www.investopedia.com/terms/i/inverseheadandshoulders.asp), also called a head and shoulders bottom. It is inverted, with the head and shoulders bottoms used to predict reversals in downtrends. This pattern is identified when the [price action](https://www.investopedia.com/terms/p/price-action.asp) of a security meets the following characteristics:

*   The price falls to a [trough](https://www.investopedia.com/terms/t/trough.asp), then rises
*   The price falls below the former trough, then rises again
*   The price falls again, but not as far as the second trough
*   Once the final trough is made, the price heads upward toward the resistance (the neckline) found near the top of the previous troughs.

> **Fast Fact**
>
> The inverse head-and-shoulders pattern reliably indicates a trend reversal from a downtrend to an uptrend. Here, prices hit three lows with brief rallies in between.

Of these, the second trough is the lowest (the head), and the first and third are slightly shallower (the shoulders). The final rally after the third dip signals that the bearish trend has reversed, and prices are likely to keep rallying upward.

## Insights Gained from Head and Shoulders Patterns

The head and shoulders pattern [indicates](https://www.investopedia.com/articles/technical/121201.asp) that a reversal is possible. Traders use the pattern of three peaks and troughs, with a taller middle peak, to predict falling stock prices. The neckline is where bearish traders typically sell.

The downtrend may continue until prices rise above the right shoulder's peak.  

## Weighing the Pros and Cons of Head and Shoulders Patterns

Advantages

*   Experienced traders identify it easily
    
*   Defined profit and risk
    
*   Big market movements can be profited from
    
*   Can be used in all markets
    

Disadvantages

*   Novice traders might miss it
    
*   Large stop loss distances possible
    
*   Neckline can appear to move
    

### Advantages Explained

*   **Experienced traders identify it easily**: The pattern is very recognizable to an experienced trader.
*   **Defined profit and risk**: Short and long entry levels and stop distances can be clearly defined with confirmation openings and closings.
*   **Big market movements can be profited from**: The timeframe for a head and shoulders pattern is fairly long, so a market can move significantly from entry to close price.
*   **Can be used in all markets**: The pattern can be used in forex and stock trading.

> **Important**
>
> While traders agree that the pattern is a reliable indicator, there is no guarantee that the trend will reverse as indicated.

### Disadvantages Explained

*   **Novice traders might miss it**: The head and shoulders pattern may not present with a flat neckline; it may be skewed, which can throw off new traders.
*   **Large stop loss distances possible**: Large downward movement over long timeframes can result in a large stop distance.
*   **Neckline can appear to move**: If the price pulls back, the neckline might be retested, confusing some traders.

## What Does a Head and Shoulders Pattern Tell You?

The head and shoulders chart is said to depict a bullish-to-bearish trend reversal and signals that an upward trend is nearing its end. Investors consider it to be one of the most reliable trend reversal patterns.

## How Reliable Is a Head and Shoulders Pattern?

The most common entry point is a breakout of the neckline, with a stop above (market top) or below (market bottom) the right shoulder. The profit target is the difference between the high and low with the pattern added (market bottom) or subtracted (market top) from the breakout price. The system is not perfect, but it does provide a method of trading the markets based on logical price movements.

## Can Head and Shoulders Turn Bullish?

An inverse head and shoulders, also called a "head and shoulders bottom," is similar to the standard head and shoulders pattern but inverted, with the head and shoulders top used to predict reversals in downtrends. It is a bearish-to-bullish indicator.

## What Is the Opposite of a Head and Shoulders Pattern?

The inverse head and shoulders pattern is the opposite of the head and shoulders, indicating a reversal from a bearish trend to a bullish trend.

## The Bottom Line

The head and shoulders is a pattern used by traders to identify price reversals. A bearish head and shoulders has three peaks, with the middle one reaching higher than the other two. It indicates a reversal of an upward trend.

A bullish head and shoulders has three troughs, with the middle one reaching lower than the other two. It indicates a reversal of a downward trend.

> **Article Sources**
>
> 1.  Charles Schwab. "[Identifying Head-and-Shoulders Patterns in Stock Charts](https://www.schwab.com/learn/story/identifying-head-and-shoulders-patterns-stock-charts)."