Head and Shoulders

The Head and Shoulders pattern is one of the most famous reversal patterns in technical analysis. It typically appears at the end of an uptrend and consists of three consecutive peaks: the left shoulder, followed by the head, which represents the highest peak in the pattern, and then the right shoulder, which is roughly similar in height to the left shoulder. The troughs between the shoulders are connected by a line known as the neckline, which can be horizontal or slightly sloped.

The pattern is confirmed when the price breaks below the neckline following the formation of the right shoulder. The height from the head to the neckline is used to estimate the potential price target after the breakdown, calculated by projecting this distance downward from the neckline breakout point.

There is also an opposite pattern known as the Inverse Head and Shoulders, which appears at the end of a downtrend and consists of three troughs following the same logic. When confirmed, it indicates a potential trend reversal from bearish to bullish.

A common mistake is rushing to assume the pattern has formed before the right shoulder is actually complete, or ignoring the necessity of confirming the neckline break with a clear candlestick close and high trading volume. It should also be noted that the symmetry of the shoulders does not have to be completely perfect; a relative similarity in height is sufficient, provided the head is clearly the highest point in the pattern.