{"id":6562,"date":"2023-03-02T19:14:38","date_gmt":"2023-03-02T19:14:38","guid":{"rendered":"https:\/\/www.wallstreetzen.com\/blog\/?p=6562"},"modified":"2025-05-15T15:30:42","modified_gmt":"2025-05-15T15:30:42","slug":"head-and-shoulders-pattern","status":"publish","type":"post","link":"https:\/\/www.wallstreetzen.com\/blog\/head-and-shoulders-pattern\/","title":{"rendered":"Head and Shoulders Pattern: Reversal Stock Trading Pattern Overview"},"content":{"rendered":"    <div id=\"callout-box-block_ce4a09ac51f55ce3adfb680e4c777136\" class=\"callout-box promo\">\n        <div class=\"callout-box__icon-wrapper\">\n            <svg focusable=\"false\" class=\"callout-box__icon promo\" viewBox=\"0 0 24 24\" aria-hidden=\"true\">\n                <path d=\"M21.41 11.58l-9-9C12.05 2.22 11.55 2 11 2H4c-1.1 0-2 .9-2 2v7c0 .55.22 1.05.59 1.42l9 9c.36.36.86.58 1.41.58.55 0 1.05-.22 1.41-.59l7-7c.37-.36.59-.86.59-1.41 0-.55-.23-1.06-.59-1.42zM5.5 7C4.67 7 4 6.33 4 5.5S4.67 4 5.5 4 7 4.67 7 5.5 6.33 7 5.5 7z\"><\/path>            <\/svg>\n        <\/div>\n        <div class=\"callout-box__content\"><p><strong><em>The best charting app &amp; broker for head and shoulders patterns&#8230;<\/em><\/strong><\/p>\n<p>If you\u2019re looking for a stock charting app, there\u2019s a good chance that you\u2019re also looking for a broker. <a href=\"https:\/\/www.wallstreetzen.com\/go\/tradestation\" target=\"_blank\" rel=\"noopener nofollow\" data-wpel-link=\"exclude\">TradeStation<\/a>\u00a0has the best free charting software on the market \u2013 and if its proprietary charts aren\u2019t enough for you, it integrates fully with <a href=\"https:\/\/www.wallstreetzen.com\/go\/tradingview-pro\" target=\"_blank\">TradingView<\/a>! That means you can use TradeStation for your broker and make trades directly from a TradingView chart.<\/p>\n<p>But TradeStation\u2019s in-house charts shouldn\u2019t be overlooked. Its custom-built tools include:<\/p>\n<ul>\n<li><strong>Chart Analysis<\/strong> \u2013 a multi-function window where you can look up price data, perform technical analysis, back-test and automate strategies, and show orders and positions<\/li>\n<li><strong style=\"font-size: 16px;\">RadarScreen<\/strong><span style=\"font-size: 16px;\"> \u2013 one of the most specced-out stock screeners available, featuring alerts and real-time watchlists with 329 criteria built in <\/span><\/li>\n<li><strong style=\"font-size: 16px;\">Matrix<\/strong><span style=\"font-size: 16px;\">\u00a0\u2013 this takes all of the tools typically featured alongside charts (a market depth window, buy and sell signals, and an order-entry tool) and puts them into one window<\/span><\/li>\n<\/ul>\n<p><a href=\"https:\/\/www.wallstreetzen.com\/go\/tradestation\" target=\"_blank\">Sign up for TradeStation here.<\/a><\/p>\n<p>&nbsp;<\/p>\n<\/div>\n    <\/div>\n\n\n\n<figure class=\"wp-block-pullquote\"><blockquote><p>\u201cWhere you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt.\u201d<\/p><cite>Paul Tudor Jones<\/cite><\/blockquote><\/figure>\n\n\n\n<p>The best traders in the world only take trades where they are extremely confident in the direction of the stock. These traders allow hundreds of good setups to pass them by as they wait for the perfect setup. By doing so, they can control their risk-to-reward ratio in each trade.<\/p>\n\n\n\n<p>One of the most reliable trends to trade is the head and shoulders pattern.<\/p>\n\n\n\n<p>The head and shoulder trading pattern is easy to identify and can be used to enter a bearish position after a bullish trend. It\u2019s identified with three peaks and indicates an upward trend is coming to an end.<\/p>\n\n\n\n<p>Let\u2019s jump in to discuss the head and shoulder pattern components, pros and cons, and how to utilize this strategy for trading success.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><img decoding=\"async\" src=\"https:\/\/www.wallstreetzen.com\/blog\/wp-content\/uploads\/2023\/03\/Screen-Shot-2023-02-27-at-7.07.22-PM.png\" alt=\"Screen shot 2023-02-27 at 7.07.22 pm\"\/><\/figure><\/div>\n\n\n<h2 id=\"h.vncratcyb0uz\"><strong>What Is a Head and Shoulders Pattern?<\/strong><\/h2>\n\n\n\n<p>The head and shoulders stock pattern is a common tool to help identify the fall of a previously rising stock. As such, it is a bearish pattern that signals a reversal.<\/p>\n\n\n\n<p>There are four main components of the head and shoulders pattern shown in the image below. The different peaks created look like a left shoulder, head and right shoulder. <\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><img decoding=\"async\" src=\"https:\/\/www.wallstreetzen.com\/blog\/wp-content\/uploads\/2023\/03\/head-and-shoulders-pattern.png\" alt=\"Head and shoulders pattern\"\/><\/figure><\/div>\n\n\n<p>The head and shoulders pattern is a reversal trend, indicating price movement is changing from bullish to bearish.<\/p>\n\n\n\n<p>The pattern is never perfect in shape, as price fluctuations can happen in between the shifts. <\/p>\n\n\n\n<h2 id=\"h.uk3lpwm6a65x\"><strong>The Components of a Head and Shoulders Trading Pattern<\/strong><\/h2>\n\n\n\n<p>Let\u2019s take a look at the four components that make up the formation. <\/p>\n\n\n\n<ul>\n<li><strong>Left Shoulder<\/strong>&nbsp;&#8211; This first peak is formed after a bullish run and high trading volume. The decline forms into a trough and looks like a \u2018shoulder.\u2019 <\/li>\n\n\n\n<li><strong>Head<\/strong>&nbsp;&#8211; The head is formed as prices rise above the left shoulder peak, then begin to decline again.<\/li>\n\n\n\n<li><strong>Right Shoulder<\/strong>&nbsp;&#8211; Prices rise again, similar to the left shoulder peak level, before declining once more. <\/li>\n\n\n\n<li><strong>Neckline<\/strong>&nbsp;&#8211; The line connecting the first and third trough. The neckline is the level of support or resistance traders use to determine placing an order. <\/li>\n<\/ul>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><img decoding=\"async\" src=\"https:\/\/www.wallstreetzen.com\/blog\/wp-content\/uploads\/2023\/03\/Untitled-3.png\" alt=\"Untitled\"\/><\/figure><\/div>\n\n\n<p>The image above shows the most critical point in the head and shoulders trading pattern setup.<\/p>\n\n\n\n<p>After completing the right shoulder, prices are falling below the neckline, indicating further price declines. The breaking of the neckline here signals your entry point into a bearish position.<\/p>\n\n\n    <div id=\"callout-box-block_2a7317572966f1ec851aabaf77682579\" class=\"callout-box promo\">\n        <div class=\"callout-box__icon-wrapper\">\n            <svg focusable=\"false\" class=\"callout-box__icon promo\" viewBox=\"0 0 24 24\" aria-hidden=\"true\">\n                <path d=\"M21.41 11.58l-9-9C12.05 2.22 11.55 2 11 2H4c-1.1 0-2 .9-2 2v7c0 .55.22 1.05.59 1.42l9 9c.36.36.86.58 1.41.58.55 0 1.05-.22 1.41-.59l7-7c.37-.36.59-.86.59-1.41 0-.55-.23-1.06-.59-1.42zM5.5 7C4.67 7 4 6.33 4 5.5S4.67 4 5.5 4 7 4.67 7 5.5 6.33 7 5.5 7z\"><\/path>            <\/svg>\n        <\/div>\n        <div class=\"callout-box__content\"><p><span style=\"font-weight: 400;\">You might be interested in Investors Underground, a day trading community with exceptional educational materials.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">IU offers 3 trading courses with a track record of transforming brand-new traders into full-time trading professionals.<\/span><\/p>\n<p><a href=\"https:\/\/www.wallstreetzen.com\/go\/investors-underground\" target=\"_blank\"><span style=\"font-weight: 400;\">Check out the courses.<\/span><\/a><\/p>\n<\/div>\n    <\/div>\n\n\n\n<h2 id=\"h.i0t9ojhx9782\"><strong>How to Trade a Head and Shoulders Pattern<\/strong><\/h2>\n\n\n\n<p>It\u2019s important to remain patient and wait for price action to break the neckline after the right shoulder, allowing the pattern to form completely. A <a href=\"https:\/\/www.wallstreetzen.com\/blog\/descending-triangle-pattern\/\" target=\"_blank\" rel=\"noopener\">descending triangle<\/a> on the right shoulder can provide further confirmation of a bearish trend. <\/p>\n\n\n\n<p>Entering a short position is a way to capitalize on a declining price. How does this work? First you borrow shares of a stock from your broker to sell at the market price. Then you purchase the shares back at a lower price to return back to the broker. The profit is in the amount the stock has declined. Check out <a href=\"https:\/\/www.wallstreetzen.com\/blog\/how-do-investors-borrow-shares\/\" target=\"_blank\" rel=\"noopener\">how do investors borrow shares<\/a> for an explanation of this process. <\/p>\n\n\n\n<p>Here are three steps to execute a short sale:<\/p>\n\n\n\n<ol>\n<li>Set a stop order \u2013 this is for protection in case the stock moves above a set price.<\/li>\n\n\n\n<li>Enter the short position.<\/li>\n\n\n\n<li>Close out the position at the price target. <\/li>\n<\/ol>\n\n\n\n<p>To determine a price target, measure the distance from the top of the head down to the neckline. This is your spread. If the spread is $10, you\u2019d be able to estimate that the stock price may decline $10 below the neckline level.<\/p>\n\n\n\n<p>Let\u2019s put it all together: Stock ABC just formed the right shoulder and is trading at $35 per share, the neckline. After confirmation of it breaking below $35, you borrow 100 shares and sell them short for $3,500. The share price moves from $35 to $25, where you purchase 100 shares to replace what was borrowed.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><img decoding=\"async\" src=\"https:\/\/www.wallstreetzen.com\/blog\/wp-content\/uploads\/2023\/03\/Screen-Shot-2023-02-28-at-11.13.40-PM.png\" alt=\"Screen shot 2023-02-28 at 11.13.40 pm\"\/><\/figure><\/div>\n\n\n<p>The profit is 100 x $10 = $1,000. <\/p>\n\n\n\n<h2 id=\"h.xo74y8syfa43\"><strong>What Is an Inverse Head and Shoulders Pattern?<\/strong><\/h2>\n\n\n\n<p>An <a href=\"https:\/\/www.wallstreetzen.com\/blog\/inverse-head-and-shoulders-pattern\/\" target=\"_blank\" rel=\"noopener\">inverse head and shoulders pattern<\/a> is a mirror of the head and shoulders pattern. As such, it\u2019s sometimes referred to as a head and shoulders pattern reversal.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><img decoding=\"async\" src=\"https:\/\/www.wallstreetzen.com\/blog\/wp-content\/uploads\/2023\/03\/Screen-Shot-2023-02-28-at-10.12.37-PM.png\" alt=\"Screen shot 2023-02-28 at 10.12.37 pm\"\/><\/figure><\/div>\n\n\n<p>While the traditional head and shoulders pattern is seen at the peak of the market, the inverse will be at the bottom. Therefore, this is a bearish to bullish strategy. Here are the components:<\/p>\n\n\n\n<ul>\n<li><strong>Left Shoulder<\/strong>&nbsp;&#8211; A price decline bottoms out, followed by a price increase. <\/li>\n\n\n\n<li><strong>Head<\/strong>&nbsp;&#8211; The head is formed as prices decline below the left shoulder peak, then begin to increase again.<\/li>\n\n\n\n<li><strong>Right Shoulder<\/strong>&nbsp;&#8211; Prices decline again, similar to the left shoulder peak level, before increasing once more. <\/li>\n\n\n\n<li><strong>Neckline<\/strong>&nbsp;&#8211; The line connecting the first and third trough. The neckline is the level of support or resistance traders use to determine placing an order. <\/li>\n<\/ul>\n\n\n    <div id=\"callout-box-block_8241914f7988db6d619de78cd03fd6dc\" class=\"callout-box promo\">\n        <div class=\"callout-box__icon-wrapper\">\n            <svg focusable=\"false\" class=\"callout-box__icon promo\" viewBox=\"0 0 24 24\" aria-hidden=\"true\">\n                <path d=\"M21.41 11.58l-9-9C12.05 2.22 11.55 2 11 2H4c-1.1 0-2 .9-2 2v7c0 .55.22 1.05.59 1.42l9 9c.36.36.86.58 1.41.58.55 0 1.05-.22 1.41-.59l7-7c.37-.36.59-.86.59-1.41 0-.55-.23-1.06-.59-1.42zM5.5 7C4.67 7 4 6.33 4 5.5S4.67 4 5.5 4 7 4.67 7 5.5 6.33 7 5.5 7z\"><\/path>            <\/svg>\n        <\/div>\n        <div class=\"callout-box__content\"><p><b>The Ultimate Day Trading Setup<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The best brokerage for day trading:<\/span> <a href=\"https:\/\/www.wallstreetzen.com\/go\/tradestation\" target=\"_blank\"><span style=\"font-weight: 400;\">TradeStation<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The best day trading ecourses &amp; community:<\/span> <a href=\"https:\/\/www.wallstreetzen.com\/go\/investors-underground\" target=\"_blank\"><span style=\"font-weight: 400;\">Investors Underground<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The best day trading computer:<\/span> <a href=\"https:\/\/mt128.isrefer.com\/go\/dt\/EZTradingComputers\/\"><span style=\"font-weight: 400;\">Radical X13<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">The best charting platform: <a href=\"https:\/\/www.wallstreetzen.com\/go\/tradingview\" target=\"_blank\"><span>TradingView<\/span><\/a><\/li>\n<\/ul>\n<\/div>\n    <\/div>\n\n\n\n<h2 id=\"h.buy9e9word2k\"><strong>How to Trade an Inverse Head and Shoulders Pattern<\/strong><\/h2>\n\n\n\n<p>Similar to the traditional head and shoulders pattern, allowing the neckline to form will help to determine where to place a stop order. The inverse pattern is an upward trend so the stop can be placed just below the right shoulder. <\/p>\n\n\n\n<p>The price target will be the difference between the head and neckline. This figure can be added to the neckline to determine the price target.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><img decoding=\"async\" src=\"https:\/\/www.wallstreetzen.com\/blog\/wp-content\/uploads\/2023\/03\/Screen-Shot-2023-02-28-at-10.16.10-PM.png\" alt=\"Screen shot 2023-02-28 at 10.16.10 pm\"\/><\/figure><\/div>\n\n\n<p>As seen in the image above, the price may fall back to the neckline to find support before going higher. If this is the case, traders have a 2nd potential entry point.<\/p>\n\n\n\n<h2 id=\"h.5cr2m6g6irpf\"><strong>Pros and Cons of Trading a Head and Shoulder Pattern<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"mtr-table mtr-tr-td\"><tbody><tr><td data-mtr-content=\"Pros\" class=\"mtr-td-tag\"><div class=\"mtr-cell-content\"><strong>Pros<\/strong><\/div><\/td><td data-mtr-content=\"Cons\" class=\"mtr-td-tag\"><div class=\"mtr-cell-content\"><strong>Cons<\/strong><\/div><\/td><\/tr><tr><td data-mtr-content=\"Pros\" class=\"mtr-td-tag\"><div class=\"mtr-cell-content\">Easy to identify for experienced traders<\/div><\/td><td data-mtr-content=\"Cons\" class=\"mtr-td-tag\"><div class=\"mtr-cell-content\">Pattern isn\u2019t always perfect, novice trader may overlook<\/div><\/td><\/tr><tr><td data-mtr-content=\"Pros\" class=\"mtr-td-tag\"><div class=\"mtr-cell-content\">Profit opportunity in all markets<\/div><\/td><td data-mtr-content=\"Cons\" class=\"mtr-td-tag\"><div class=\"mtr-cell-content\">Long wait periods for patterns to develop<\/div><\/td><\/tr><tr><td data-mtr-content=\"Pros\" class=\"mtr-td-tag\"><div class=\"mtr-cell-content\">Historically reliable trading pattern<\/div><\/td><td data-mtr-content=\"Cons\" class=\"mtr-td-tag\"><div class=\"mtr-cell-content\">Patterns can be subjective<\/div><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 id=\"h.uvhjoq3ygjzp\"><strong>How Reliable Is a Head and Shoulder Trading Pattern?<\/strong><\/h2>\n\n\n\n<p>The head and shoulders stock pattern is one of the most reliable patterns according to market analysts. By identifying the neckline, you can use logic to determine entry points and identify price reversals.<\/p>\n\n\n\n<p>That said, most traders will not trade based on the head and shoulders pattern alone &#8211; they will confirm the chart pattern with <a href=\"https:\/\/www.wallstreetzen.com\/blog\/best-volume-indicators\/\" target=\"_blank\" rel=\"noopener\">volume indicators<\/a>&nbsp;or other technical analysis tools.<\/p>\n\n\n\n<h2 id=\"h.qb15l3580o02\"><strong>Final Word: Head and Shoulders Pattern<\/strong><\/h2>\n\n\n\n<p>The head and shoulders pattern helps traders identify price reversals to spot profit opportunities. While it\u2019s preferred both shoulders are symmetrical, this is not a requirement so allowing the pattern to develop and identifying the neckline are the most critical factors. The head and shoulders pattern is one of many indicators I\u2019d recommend any investor incorporating into their trading strategy.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n\t\t<div class=\"wp-faq-schema-wrap\">\n\t\t\t\t\t\t\t<h2>FAQs:<\/h2>\n\t\t\t\t\t\t<div class=\"wp-faq-schema-items\">\n\t\t\t\t\t\t\t\t\t<h3>Is a head and shoulders pattern bullish?<\/h3>\n\t\t\t\t\t<div class=\"\">\n\t\t\t\t\t\t<p>The head and shoulders pattern is a bearish pattern and signals a reversal from upward to downward price movement.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<h3>Is head and shoulder bullish or bearish?<\/h3>\n\t\t\t\t\t<div class=\"\">\n\t\t\t\t\t\t<p>Head and shoulder is a bearish pattern. After the formation of three peaks and the breaking of the neckline, the stock is expected to head lower.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<h3>What is the meaning of head and shoulders pattern?<\/h3>\n\t\t\t\t\t<div class=\"\">\n\t\t\t\t\t\t<p>The head and shoulders pattern is named such because of the visual pattern it forms: a left shoulder, head, right shoulder and neckline.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t<h3>What happens after a head and shoulders pattern?<\/h3>\n\t\t\t\t\t<div class=\"\">\n\t\t\t\t\t\t<p>After a head and shoulders pattern forms, the price will move lower after breaking through the neckline.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\n","protected":false},"excerpt":{"rendered":"<p>\u201cWhere you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt.\u201d Paul Tudor Jones The best traders in the world only take trades where they are extremely confident in the direction of the stock. These traders allow hundreds of good setups to pass them by [&hellip;]<\/p>\n","protected":false},"author":14,"featured_media":6557,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false},"categories":[22],"tags":[],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Head and Shoulders Pattern: Reversal Stock Trading Pattern Overview<\/title>\n<meta name=\"description\" content=\"Wondering what the head and shoulders pattern indicates and how to trade it? 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