What is Head and Shoulders Pattern?
The head and shoulders pattern is a bearish reversal pattern consisting of three peaks: a higher middle peak (head) flanked by two lower peaks (shoulders), with a neckline connecting the troughs between them.
Head and Shoulders Pattern Explained
This is one of the most reliable and well-studied chart patterns. The pattern shows a shift from bullish enthusiasm (first shoulder and head) to distribution (second shoulder). A break below the neckline confirms the pattern, with a price target equal to the distance from the head to the neckline projected downward from the breakout point. Volume should decrease on the right shoulder.
Real-World Example
Stock forms left shoulder at $100, head at $108, right shoulder at $102. The neckline is at $95. When price breaks $95 on volume, the pattern is confirmed. Target: $95 - ($108 - $95) = $82. A trader shorts at $94 with a stop at $97 and targets $82.
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