Head and shoulders pattern

Why it works

The head is the last higher high. The right shoulder is a lower high: buyers could no longer reach the previous peak. The neckline break is a lower low: in market-structure terms, a change of character.

The pattern gives an objective entry, stop and target from its own dimensions.

The rules

Setup

• A clear prior uptrend.
• Left shoulder, a higher head and a lower right shoulder, with a neckline drawn through the two troughs.

Entry

• Sell on a candle close below the neckline.
• Conservative entry: sell the retest of the neckline from below.

Stop loss

• Above the right shoulder (or above the retest high for the conservative entry).

Exit and management

• Measured target: the height from the head to the neckline, projected down from the break point.

Filters that improve it

• Volume often falls from the left shoulder to the right shoulder and rises on the break.
• The inverse pattern (inverse head and shoulders) works the same way at bottoms.

Worked example

Illustrative EUR/USD example on 4H: left shoulder at 1.1020, head at 1.1080, right shoulder at 1.1030, neckline at 1.0960. The distance head–neckline is 120 pips. A 4H close at 1.0950 triggers the short; stop above the right shoulder at 1.1040 (90 pips), target at 1.0840 (120 pips below the neckline).

Illustrative numbers, not a recommendation.

Common mistakes

• Selling before the neckline breaks: until then it is still an uptrend.
• Seeing the pattern everywhere: shoulders should be roughly symmetrical and the trend before it clear.

How to practise it

Candlemind's drawing tools include patterns and trend lines: draw the neckline when the right shoulder forms and wait for a close below it.

Pre-trade checklist

1. Clear prior trend
2. Head higher than both shoulders
3. Close beyond the neckline (or retest)
4. Stop beyond the right shoulder
5. Target = head-to-neckline height

Frequently asked questions