The head-and-shoulders chart pattern is a popular and easy-to-spot pattern - once a trader is aware of what they are watching for. The pattern appears on all times frames and can therefore be used by day and swing traders as well as investors. Entry levels, stop levels and price targets make the formation easy to implement as the chart pattern provides important and easy-to-see levels. (Every time an investor talks about getting in low or picking entry and exit points, they are paying homage to these men. Check out The Pioneers Of Technical Analysis.)

TUTORIAL: Learn To Analyze Chart Patterns

What the Pattern Looks Like
First, we'll look at the formation of the head and shoulders pattern and the inverse head and shoulders.


  • Seen at market tops.
  • Formation of the pattern:
    • Left shoulder: Price rise followed by a left price peak, followed by a decline.
    • Head: Price rise again forming a higher peak.
    • Right shoulder: A decline occurs once again, followed by a rise forming the right peak which is lower than the head.
  • Formations are rarely perfect, which means there may be some noise between the respective shoulders and head.
Example of Head and Shoulders Pattern
Figure 1: SOLF Daily Chart – Head and Shoulders (June 2010-Dec. 2010)
Source: Think or Swim - TD Ameritrade

Inverse Head-and-Shoulders

  • Seen at market bottoms.
  • Formation of the pattern:
    • Left shoulder: Price declines and moves higher.
    • Head: another Decline occurs to a lower level.
    • Right shoulder: Price then moves higher and moves back lower, but not as low as the head.
  • Again, formations are rarely perfect. There may be some market noise between the respective shoulders and head.
Example of Inverse Head and Shoulders Pattern
Figure 2: SPY Daily Chart - Inverse Head and Shoulders (April 2010-Sept. 2010)
Source: Think or Swim-TD Ameritrade

Placing the Neckline
The first step is to locate the left shoulder, head and right shoulder on the chart. In the standard head and shoulders pattern (market top), we connect the low after the left shoulder with the low created after the head. This creates our "neckline" - the yellow line on the charts. We'll discuss the importance of the neckline in the following section. In a reverse head-and-shoulders pattern, we connect the high after the left shoulder with the high formed after the head thus creating our neckline for this pattern.

How to Trade the Pattern
It is very important that traders wait for the pattern to complete. One should not assume that a pattern will develop, or that a partially developed pattern will become complete in the future. Partial or nearly completed patterns should be watched, but no trades should be made until the pattern breaks the neckline. In the head and shoulders we are waiting for price action to move lower than the neckline after the peak of the right shoulder. For the inverse head and shoulder, we wait for price movement above the neckline after the right shoulder is formed.

A trade can be initiated as the pattern completes. Plan the trade beforehand, writing down the entry, stops and profit targets and noting any variables that will change your stop or profit target.

The most common entry is when a breakout occurs - the neckline is broken and a trade is taken. Another entry point requires more patience and comes with the possibility that the move may be missed all together. This method involves waiting for a pullback to the neckline after a breakout has already occurred. This is more conservative in that we can see if the pullback stops and the original breakout direction resumes, but it also means the trade may be missed if the price keeps moving in the breakout direction. Both methods are shown in Figure 3.

Possible Entry Points
Figure 3: SPY Daily Chart – Possible Entry Points (Aug. 2010-Oct. 2010)
Source: Think or Swim-TD Ameritrade

Placing Your Stops
In the traditional market top pattern, the stops are placed just above the right shoulder (topping pattern) after the neckline is penetrated. Alternatively the head of the pattern can be used as a stop, but this is likely a much larger risk and thus reduces the reward to risk to ratio of the pattern. In the inverse pattern, the stop is placed just below the right shoulder. Again, the stop can be placed at the head of the pattern, although this does expose the trader to greater risk. In Figure 3, the stop would be placed at 104 (just below right shoulder) once the trade was taken.

Setting Your Profit Targets
The profit target for the pattern is the price difference between the head and low point of either shoulder. This difference is then subtracted from the neckline breakout level (at a market top) to provide a price target to the downside. For a market bottom, the difference is added to the neckline breakout price to provide a price target to the upside.

As SPY is a heavily traded ETF representing the broader market, the profit target for the inverse head and shoulders pattern in Figure 2 would be:

113.20 (this is the high after left shoulder) – 101.13 (this is the low of the head) = 12.07

This difference is then added to the breakout price (subtracted in the case of a regular head and shoulders pattern). The breakout price is right around 113.25, giving us a profit target of 125.32 (113.25 + 12.07).

Sometimes, investors have to wait a long time - up to several months - between spotting the breakout and reaching the ideal profit target. (Monitoring your trades in real-time can help you anticipate their outcomes. Check out Anticipate Trends To Find Profits.)

Why the Head-and-Shoulders Pattern Works
No pattern is perfect, nor does it work every time. Yet there are several reasons why the chart pattern theoretically works (the market top will be used for this reasoning, but it applies to both):

  • As price falls from the market high (head), sellers have begun to enter the market and there is less aggressive buying.
  • As the neckline is approached, many people who bought in the final wave higher or bought on the rally in the right shoulder are now proven wrong and facing large losses – it is this large group which now will exit positions driving the price towards the profit target.
  • The stop above the right shoulder is logical because the trend has shifted downwards – the right shoulder is a lower high than the head - and therefore the right shoulder is unlikely to be broken until an uptrend resumes.
  • The profit target assumes that those who are wrong or purchased the security at a poor time will be forced to exit their positions, thus creating a reversal of similar magnitude to the topping pattern which just occurred.
  • The neckline is the point at which many traders are experiencing pain and will be forced to exit positions, thus pushing the price towards the price target.
  • Volume can be watched as well. During inverse head and shoulder patterns (market bottoms), we would ideally like the volume to expand as a breakout occurs. This shows increased buying interest that will move price towards the target. Decreasing volume shows lack of interest in the upside move and warrants some skepticism.

The Pitfalls of Trading Head-and-Shoulders
As stated, the pattern is not perfect. Here are some potential problems with trading a head and shoulders pattern:

  • You need to find patterns and watch them develop, but you should not trade this strategy until it is completed. So it could mean a long period of waiting.
  • It will not work all the time. The stop levels will be hit sometimes.
  • The profit target will not always be reached, so traders may wish to fine tune how market variables will affect their exit from the security.
  • The pattern is not always tradable. For example, if there is a massive drop on one of the shoulders due to an unpredictable event, then the calculated price targets will likely not be hit.
  • Patterns can be subjective. One trader may see a shoulder, where another does not. When trading patterns, define what constitutes a pattern for you beforehand - given the general guidelines above.

Bottom Line
Head and shoulder patterns occur on all times frames, and can be seen visually. While subjective at times, the complete pattern provides entries, stops and profit targets making it easy to implement a trading strategy. The pattern is composed of a left shoulder, head, then followed by a right shoulder. The most common entry point is a breakout of the neckline, with a stop above (market top) or below (market bottom) the right shoulder. The profit target is the difference of the high and low with the pattern added (market bottom) or subtracted (market top) from the breakout price. The system is not perfect, but does provide a method of trading the markets based on logical price movements. (Profit-taking opportunities abound using this lesser-known pattern. Find out how. See Introducing The Bearish Diamond Formation.)

Related Articles
  1. Chart Advisor

    Stocks at Important Technical Levels

    These stocks are breaking or holding at key support and resistance levels. How they react here impacts the direction of the price over the coming months.
  2. Technical Indicators

    Explaining Autocorrelation

    Autocorrelation is the measure of an internal correlation with a given time series.
  3. Chart Advisor

    ChartAdvisor for October 9 2015

    Weekly technical summary of the major U.S. indexes.
  4. Chart Advisor

    These Oil & Gas Stocks Have Reversed

    It's been a long downtrend for oil stock owners, but there's hope. These four oil and gas stocks have reversed and may keep trending to the upside.
  5. Chart Advisor

    Bumpy Roads Ahead In Transportation

    Investors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
  6. Chart Advisor

    4 European Stocks to Consider Buying

    European companies, listed on US exchanges, that are providing buying opportunities right now.
  7. Investing Basics

    3 Key Signs Of A Market Top

    When stocks rise or fall, the financial fate of investors change, as well. There are certain signs that can reveal a stock’s course, and investors don’t need to be experts to spot them.
  8. Chart Advisor

    ChartAdvisor for October 2 2015

    Weekly technical summary of the major U.S. indexes.
  9. Investing

    How Diversifying Can Help You Manage Market Mayhem

    The recent market volatility, while not unexpected, has certainly been hard for any investor to digest.
  10. Technical Indicators

    Why MACD Divergence Is an Unreliable Signal

    MACD divergence is a popular method for predicting reversals, but unfortunately it isn't very accurate. Learn the weaknesses of indicator divergence.
  1. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  2. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  3. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  4. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  5. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  6. How do you know where on the oscillator you should make a purchase or sale?

    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Ex Works (EXW)

    An international trade term requiring the seller to make goods ready for pickup at his or her own place of business. All ...
  2. Letter of Intent - LOI

    A document outlining the terms of an agreement before it is finalized. LOIs are usually not legally binding in their entirety. ...
  3. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  4. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  5. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  6. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!