The Head and Shoulders Pattern Forms

The Head and Shoulders pattern forms after an uptrend, and if confirmed, marks a trend reversal. The opposite pattern, the Inverse Head and Shoulders, therefore forms after a downtrend and marks the end of the downward price movement. In the current article we will only discuss the Head and Shoulders pattern, because the inverse variety is its twin, but from a bullish point of view.

As you can guess by its name, the Head and Shoulders pattern consists of three peaks – a left shoulder, a head and a right shoulder. The head should be the highest (what an abomination it would be otherwise) and the two shoulders should be at least relatively of equal height. As the price corrects from each peak, the lows it retreats to form the so-called neckline, which is later used for confirming the pattern (we will get to that soon enough). Here is how an H&S pattern looks like.