Head and Shoulders pattern: explanation, examples and trading strategies
The Head and Shoulders pattern is one of the most well-known and reliable signals in technical analysis. Traders use this pattern to identify trend reversals—moments when price direction changes. The pattern appears in both traditional markets and crypto and provides insight into the shift from buying to selling pressure (or vice versa in the inverse variant). In this article, you‘ll learn what the Head and Shoulders pattern is, how to recognize it, and how traders apply it in their strategies.In short
- The Head and Shoulders pattern is a chart structure that often precedes a trend reversal.
- It consists of three peaks: two shoulders and a higher “head” in the middle.
- A neckline forms the lower boundary of the pattern.
- When price closes below the neckline, it usually confirms a bearish trend reversal.
- The inverse version is called the Inverse Head and Shoulders and signals a potential bullish reversal.
What is the Head and Shoulders pattern?
The Head and Shoulders pattern is a reversal pattern that typically forms after a prolonged uptrend. It shows that buyers are gradually losing strength while sellers start to take control. Visually, the pattern consists of:- An initial peak (left shoulder)
- A higher peak (head)
- A lower peak (right shoulder)
How do you recognize a Head and Shoulders pattern?
A well-formed Head and Shoulders pattern has a clear three-peak structure and a visible neckline.The left shoulder
The first peak often marks a local resistance level, followed by a modest correction.The head (highest point)
The second peak is clearly higher than the first. This is where buying pressure reaches its peak before price falls back toward the neckline.The right shoulder
The final peak is lower than the head and often near the level of the left shoulder, indicating weakening buying pressure.The neckline
- The neckline connects the lows between the peaks.
- A break below this line confirms the pattern.
- The sharper and more decisive the break, the stronger the signal.
What does the Head and Shoulders pattern mean in crypto?
Bearish reversal signal
When price breaks below the neckline, it often signals a reversal from bullish to bearish. Traders may see this as an opportunity to take profits or consider short positions.Market psychology behind the pattern
- Left shoulder: early selling after an uptrend
- Head: euphoria and the final buying wave
- Right shoulder: declining confidence and fewer buyers
- Neckline break: sellers take control
When the pattern is more reliable
- High volume during the neckline break
- Clear symmetry between the shoulders
- Confirmation via indicators such as RSI divergence or MACD crossovers
Inverse Head and Shoulders pattern
The Inverse Head and Shoulders is the opposite variant and usually forms after a downtrend. It signals a potential upward trend reversal.Structure of the inverse pattern
- An initial low (left shoulder)
- A lower low (head)
- A higher low (right shoulder)
Bullish reversal signal
A breakout above the neckline accompanied by rising volume often confirms that buyers are regaining control.Difference from the regular pattern
- Head and Shoulders: bearish trend reversal
- Inverse Head and Shoulders: bullish trend reversal
How do you trade a Head and Shoulders pattern?
Neckline break entry
- Enter after a candle closes below the neckline.
- Check whether volume supports the breakout.
Retest strategy
After the breakout, price often retests the neckline. Traders use this retest to enter with reduced risk.Setting targets using the height of the head
The distance between the head and the neckline is commonly used to calculate the price target after the breakout.Placing stop-loss orders
- Regular pattern: stop-loss above the right shoulder
- Inverse pattern: stop-loss below the right shoulder
Common mistakes with this pattern
Forcing patterns
Not every formation with three peaks is a Head and Shoulders. Wait for proper structure and confirmation.Breakout without volume
A neckline break without increasing volume is often a false breakout.Using the wrong timeframes
Small timeframes create a lot of noise. Prefer 1H, 4H, or daily charts.Entering without confirmation
Entering too early—before confirmation—often leads to losses. Wait for a clear candle close or retest.Example of a Head and Shoulders setup
Identifying the structure
After a strong uptrend, Bitcoin forms a left shoulder around €40,000, a head near €42,500, and a right shoulder around €41,000 on the 4H chart.Entry, stop-loss, and take-profit
- Entry: below the neckline at €39,800
- Stop-loss: just above the right shoulder at €41,200
- Target: €37,000
Risks and scenarios
If price moves back above the neckline, the position is closed as the pattern becomes invalid.How reliable is the Head and Shoulders pattern?
What affects reliability?
- Clear symmetry between the shoulders
- Rising volume on the breakout
- Longer formation time across multiple candles
When does it work less well?
- Extremely volatile markets
- Sideways price ranges
- Lack of volume or a poorly defined neckline
Combining with indicators (RSI, MACD, volume)
- RSI divergence: shows weakening momentum
- MACD cross: confirms trend reversal
- Volume analysis: validates breakout strength