The Head and Shoulders Chart Pattern is a bearish reversal formation that occurs in the presence of an uptrend in price. This pattern gets it’s name from having three distinct tops with the middle top being higher than either the first or the second. The middle top is known as the “head” and both lower tops on either side are called the “shoulders.”

The first two tops in this pattern fall to a common horizontal resistance or trend line known as the “neckline.” This price pattern completes as price falls away from the right shoulder and breaks through this resistance line.

Head and Shoulders Pattern Physical Characteristics:

Head and Shoulders Chart Pattern

• Occurs in the presence of an uptrend
• The left shoulder develops preferably on higher than normal volume
• The head of the pattern develops with either light or heavy volume
• The right shoulder represents a “lower high” and preferably forms in the presence of low volume
• The “neckline” is represented by the common resistance area and once broken completes the trend reversal

Head and Shoulders Pattern Market Psychology:

A successful Head and Shoulders pattern represents a reversal of trend when complete. Let’s take a look and see what is happening before this chart pattern develops, during it’s development and what to look for after it completes.

In order a the Head and Shoulders pattern to form there has to a strong uptrend in place. This means that the bulls (buyers) have been in control of price action.

With the formation of the left shoulder in this pattern the bulls take a breather and allow the bears (sellers) to take profits as price floats towards the support line which will become the “neckline” of the pattern.

As price rallies off of this resistance line the bulls take out the previous high which was the left shoulder and it appears that the previous uptrend is intact. One thing that traders using Technical Analysis should look for to confirm the strength of a trend is volume. When it comes to the Head and Shoulders pattern volume usually is considerably less during the formation of the head that it was with the left shoulder. A potential sign of a weakening trend.

As price falls away from the head it finds buyers (demand) at the same price area as the previous pullback from the left shoulder.

Once more price rallies off of this support level but this time instead of forming a higher high, price tops out and forms the right shoulder at a lower price than the head of the pattern. On top of that the right should of this pattern usually develops on very light volume. This means that price is moving upwards in a vacuum due to more of a lack of selling than intense buying pressure.

As price falls this time the previous support level doesn’t hold because there simply are no more buyers left. The uptrend is exhausted and in most cases prices experience a sharp sell off.

Head and Shoulders Pattern Trading Implications:

The Head and Shoulders pattern has a reputation for being one of the more reliable charts patterns traders use. The longer the time frame used the more reliable this pattern is. The key for traders looking to target this particular price pattern is to be on the lookout for it to form. Most traders using Technical Analysis see this pattern form because they have been taking part in the previous uptrend.

The key here is to keep an eye out for the volume. Volume shows the power behind price moves and should traders should always take careful note if volume is moving in the direction of the trend indicating strength.

Once the pattern completes and breaks through the neckline it is important for traders targeting this pattern to have a trading plan in place for this particular pattern. These include: entry points, exit points and stop loss targets to name but a few.

Don’t get spooked by the retest. You should always expect price to retest resistance which was previous support. Make sure to include that in your trading plan. Or, if you know you can’t successfully trade in the presence of a retest then adjust your rules to only enter after the retest.

Like all Chart Patterns,There are many ways to successfully trade the Head and Shoulders Chart Pattern and the most important thing is to understand the psychology behind the market and why this pattern forms as well as having a written trading plan that you can follow to take the emotional aspect out of your trading.