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Head and shoulders is one of the most reliable reversal patterns, including head and shoulders top (bearish) and head and shoulders bottom (bullish). Pattern consists of three peaks (or troughs), middle peak (head) is highest (or lowest), side peaks (shoulders) are similar height. Neckline breakout confirms pattern completion.
Head and shoulders top: Three peaks, middle highest, signals decline
Head and shoulders bottom: Three troughs, middle lowest, signals rise
Neckline: Connects lows (top) or highs (bottom) between two shoulders
Breakout confirmation: Price breaking neckline confirms pattern
Target: Distance from head to neckline projected from breakout point
Head and shoulders pattern applies to all markets and timeframes, in forex trading can be used to identify major trend reversals. The pattern is most reliable on daily and weekly charts. Suitable for medium to long-term traders, requires patience to wait for complete pattern formation.
One of most reliable reversal patterns; provides clear entry and target levels; can be identified in advance; risk-reward ratio usually very good; historically high success rate.
Pattern formation takes considerable time; may have false breakouts; requires patience to wait; pattern may not be perfect; miss early pattern opportunities.
When using head and shoulders pattern strategy, note: ensure pattern is complete including left shoulder, head, right shoulder; wait for neckline breakout confirmation; set stop below (top) or above (bottom) neckline; watch volume changes; beware of false breakouts; don't enter too early; combine with other technical tools for confirmation; exit promptly when pattern fails.
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