Head and Shoulders Pattern – Technical Analysis

Head and Shoulders pattern

One of the oldest technical analysis patterns, the head and shoulders is a reversal pattern. Because it is a time-consuming pattern, traders spot it quickly and trade it accordingly.

Yet, this is both a blessing and a curse. When forming on more significant timeframes, if many retail traders position themselves on the same side of the market, the pattern often fails.

The standard interpretation of it is that it reverses both bullish and bearish trades. Hence, it forms at the end of a bullish or bearish trend.

But this is more like a rule to be broken. It isn’t mandatory for a strong trend to exist before the head and shoulders pattern to form. The market reaction should be similar.

The Pattern’s Elements

When forming at the market top, the head and shoulders is a bearish pattern. Conversely, when it appears at the end of a downtrend, the traders look to go long.

In both cases, it has the following elements:

  • two shoulders – left and right
  • one head
  • a neckline
  • a measured move
USD/JPY Daily Chart

The two circles in the chart above show the potential left and right shoulders on the current USD/JPY daily timeframe. The movement lower followed by a quick retracement to the previous consolidation area is called the head.

For the head and shoulders pattern, the price action in the head is quite aggressive. That depends, apparently, on the timeframe.

The blue line is the neckline. As the name of the pattern comes from the human body, imagine a line connecting the two shoulders.

In technical analysis, it effectively means that the market consolidates before breaking it. In most cases, the right shoulder tends to be a continuation pattern, like an ascending triangle, a pennant or a bullish flag.

The black lines on the chart above show the measured move and its projection. Projected from the neckline, the measured move is just that: a measured move. It means that it represents only the minimum distance the price must travel for the head and shoulders to be confirmed.

Most of the times the price retests the neckline, but that’s not mandatory.

What traders do is they project the neckline from the market support on the left shoulder. Typically, that’s an area to enter on the long side (if the pattern reverses a bearish trend) or short side (if it forms after a bullish trend).

USD/JPY Daily Chart

Conclusion

The head and shoulders pattern has the advantage of being visible. It takes time for the market to consolidate on the right shoulder, and the break is highly anticipated.

It has more chances to be confirmed if it appears on the lower timeframes. On big ones, it’ll attract attention and chances for it to survive become slimmer.

In any case, it does reverse trends on all timeframes, big or small. Hence, when the head and shoulders pattern appears, traders better pay attention.

This article was written by AMarkets

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All

Top Promotions

Top Brokers

IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US