The Head and Shoulders pattern is one of the most recognized trend reversal formations in forex trading, particularly during the end of an uptrend.
This pattern signals that a bullish trend may be nearing exhaustion and that a bearish reversal could be on the horizon.
Let’s explore how to identify and trade this powerful chart formation.
🔺 What is the Head and Shoulders Pattern?
The Head and Shoulders pattern consists of three main peaks:
- The left shoulder (first peak)
- The head (highest peak)
- The right shoulder (a lower peak)
These three points form after a strong upward movement. A neckline is drawn by connecting the lowest points between the shoulders and the head. This neckline can slope upward or downward, but downward-sloping necklines often provide more reliable signals.
🖼️ Example:
When price breaks below the neckline, a bearish trend reversal is confirmed.
📈 How to Trade the Head and Shoulders Pattern
- Identify the pattern: Look for the formation of three peaks where the middle one (the head) is higher than the others.
- Draw the neckline: Connect the two lowest points between the peaks.
- Place a sell order: Set your entry just below the neckline.
- Set your target: Measure the distance from the top of the head to the neckline — this is the projected move after the breakout.
- Manage your risk: Use a stop-loss just above the right shoulder for risk control.
✅ Example Outcome:
Once the neckline is broken, price often drops by a distance similar to the height of the head. Don’t chase extra pips — take your profits!
🔻 Inverse Head and Shoulders Pattern (Bullish Reversal)
The Inverse Head and Shoulders is the flipped version of the original pattern. It occurs after a downtrend and signals a possible bullish reversal.
- The pattern is made up of three valleys.
- The middle valley (head) is the lowest, and the two surrounding valleys (shoulders) are higher.
📈 How to Trade the Inverse Head and Shoulders
- Identify the pattern: Spot the three valleys with the head in the middle.
- Draw the neckline: Connect the highs between the valleys.
- Place a buy order: Enter above the neckline.
- Set your target: Measure the distance from the lowest point of the head to the neckline, and project it upward from the breakout point.
- Stop-loss suggestion: Place it just below the right shoulder.
✅ Example Outcome:
Once the neckline breaks, price often rallies with momentum. If your target is hit — lock in profits. You can even use a trailing stop if the trend continues further.
📌 Final Tips
- The Head and Shoulders and Inverse Head and Shoulders patterns are best used on higher timeframes (H4, Daily) for stronger reliability.
- Use volume analysis or indicators like MACD or RSI for confirmation.
- Don’t rely solely on chart patterns — always consider the broader market context.
✅ Looking for more chart patterns?
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