In this blog post, I will show you step-by-step how to identify, draw, and trade the head and shoulders pattern.
Whether you’re new to trading or experienced, or trade forex, stocks, crypto, or commodities, this post will surely level up your trading.
Some of my biggest winning trades came from this reversal pattern, and I’m about to show you how it can do the same for your trading.
If you’re more of a visual learner, I’ve got you covered. Watch the head and shoulders video below to start trading this chart pattern today, and stay until the end for a bonus strategy.
Let’s begin!
What is a Head and Shoulders Chart Pattern?
The head and shoulders is a chart pattern that signals a potential reversal in the market. It’s one of the most popular patterns because it’s easy to spot and offers significant profit potential.
As you might have guessed, it got its name because it looks like a head and two shoulders on the chart. Even the different parts of the pattern sound more like Anatomy 101 than a trading lesson.
With that, let’s cover the components, and then we’ll discuss how to trade it.
Left Shoulder
The pattern starts with a “left shoulder.” In real-time, this is simply a swing high in the market as it continues an uptrend.
Head
Next is the “head”. Like the left shoulder, the head is a swing high in an uptrend. At this point, we don’t have any reason to suspect the market is about to reverse.
The #1 rule when trading this pattern is that the head must extend well above the left and right shoulders. Use your best judgment here. If it looks too close to call, it’s probably not worth trading.
Right Shoulder
The “right shoulder” is where things get interesting. Remember the swing highs from the left shoulder and head? Buyers are starting to fatigue, and we can see that by the lower high, which becomes the right shoulder.
At this point in the structure, we have enough to call it a “potential” head and shoulders. It won’t become a confirmed reversal until the market breaks the neckline.
It’s also time to put this on your watchlist as a potential trade idea.
Neckline
Lastly, we have the “neckline.” It’s a level that connects the low point after the left shoulder and the low point before the right shoulder.
The neckline of a head and shoulders can be horizontal or diagonal. If it’s diagonal, the level can slope upward or downward, as both are technically valid.
In my experience, most necklines either form horizontally or have an upward slope, as shown in the example below. Descending necklines are rare, but are technically valid as long as you follow the other rules in this lesson.
And here’s the finished product:
Be careful with descending necklines, which can sometimes turn into a falling wedge pattern. This is especially true if you like to anticipate the breakdown and get in early.
If you do that with a downward sloping neckline that morphs into a falling wedge (bullish pattern), you will be in a world of hurt.
Inverse Head and Shoulders Pattern
Before we go too far, I want to discuss the upside-down head and shoulders, also known as the inverse head and shoulders pattern. If you’re familiar with the cup and handle pattern, you’ll pick up on this quickly.
As you probably guessed, this is an inverted head and shoulders. It’s also a reversal chart pattern, but in this case, it suggests a potential bottom in the market.
Inverse head and shoulders (bullish) pattern on EURUSD.
The parts of the inverse pattern are identical to the “normal” structure. The way you trade it is also the same; it’s just the upside-down version of it.
You can trade the head and shoulders pattern as a topping or bottoming pattern. It just depends on how it develops.
How to Trade the Head and Shoulders Pattern
Okay, it’s time for the really fun stuff. Let’s talk about how to trade the pattern, including how to enter, where to place your stop loss, and what to target.
Entry
There are two schools of thought when entering a head and shoulders pattern. The first is to enter on the break, and the other is to wait for a retest of the neckline.
Neither is better than the other, as it depends on your trading style, risk tolerance, and experience.
For learning purposes, let’s cover both:
Entering on the break (option 1)
This entry option is simple. In this case, you enter the market as soon as a candle closes below the neckline.
You could also enter as the market breaks down (before the candle closes). But this is a riskier entry method since you haven’t yet received confirmation of the breakdown.
Entering on the retest (option 2)
Entering a head and shoulders on a retest is my preferred option. I always prefer to enter on retests because it offers a much better risk-to-reward ratio.
Stop Loss
Many traders get into trouble with stop loss placement. In most cases, they don’t give the market enough room and end up placing their stop loss too close to their entry.
I’m certainly not judging. I made the same mistakes once, too, but giving the market room to “breathe” is one of the best things you can do for your trading.
I’ve found that using the two-candle rule offers the best stop loss placement when trading the head and shoulders pattern. Instead of placing your stop loss on the other side of the breakdown candle, move it two candles back to give the trade more room to move in your favor.
Note that this can sometimes be a three-candle rule, as in our EURUSD example above. It’s one of those rules that can vary slightly depending on market structure.
Target
Note that this section is called target”s,” not target. Most head and shoulders blog posts tell you to target the measured objective, and that’s it. But in my experience, that’s incomplete advice.
It’s usually best to have multiple targets, especially when trading a larger pattern like this. Assuming the market will reach the one target you’ve set every time, or even in most cases, is a bit naive.
Study the recent swing lows (or highs in the case of the inverse head and shoulders) and come up with two or three targets. These will help you lock in some profit if the market doesn’t reach the measured objective.
What’s the measured objective, you ask?
A head and shoulders measured objective is simply the height of the pattern measured from the neckline.
How to find the measured objective of a head and shoulders reversal.
Think of the measured objective as your final target. But don’t forget to set one or two other targets in case the market doesn’t reach its objective.
Pro Tip: Always aim for a 1:3 risk-to-reward ratio or better, where your reward is 3x your risk.
You can also combine this pattern with technical indicators like moving averages or RSI for added confluence. ( I will talk about this in next post)
Common Mistakes to Avoid
Having traded the head and shoulders pattern for over 10 years, I’ve made every mistake in the book. Luckily, you found this blog post, so you don’t have to make the same mistakes I did.
Mistake #1: Letting FOMO Dictate Your Decisions
You know I had to include the Fear Of Missing Out (FOMO) as a top trading mistake. And I get it; having the patience to wait for a confirmed break when a setup looks so good is incredibly difficult.
But think of it like this: If you sell a head and shoulders pattern before the neckline officially breaks, you’re selling into key support. That’s never a good idea.
Start thinking of patience as part of your trading edge. It’s no longer just something you’re supposed to do. It’s something you have to do to stack the odds in your favor.
Mistake #2: Trading the Head and Shoulders on a Low Time Frame
I can hear the comments on this one already. I’m not saying you can’t trade a head and shoulders pattern on a 5-minute time frame.
However, the pattern is much more reliable on the higher time frames, like the 4-hour chart, and especially the daily chart. And that’s coming from 10+ years of experience.
If you choose to trade it on a lower time frame, be sure to stack it with other signals to improve your edge.
Mistake #3: Not Setting a Stop Loss
Okay, hear me out. Not setting a stop loss is like not buckling your seat belt. You might be okay for a while, but it’ll be too late if you ever need it. That applies to any trade setup you take, not just the head and shoulders pattern.
I’ve found that most traders who don’t use stops do so because they fear accepting the loss. In other words, they’re risking way too much.
So, I suppose we could call this mistake “not setting a stop loss and risking too much.” Either way, the message is the same: Use a stop loss anytime you put on a trade (and keep your risk under control).
BONUS: What to Do When a Pattern Fails
So, you found the perfect pattern, but it failed. Now what?
First, no technical structure or trading strategy will work 100% of the time. Losses are part of the trading game.
Second, don’t give up on the failed head and shoulders. Doing so could be a big mistake.
That goes for any chart pattern. If the market fails to respect a break on the high time frames, that failure could represent one of the highest win rate setups I’ve found in over 10 years of trading experience.
Here’s what you should do:
The first thing you need to do is verify the head and shoulders actually failed. Was it a valid pattern, and are you positive you drew the neckline correctly?
If so, proceed to the second step, which is confirming the failed break. Just like we confirmed the pattern with a high time frame close beyond the neckline, the same is true when confirming a failed break.
How to know if a head and shoulders has failed, and how to trade the fakeout.
Notice how the EURUSD confirmed the reversal pattern, but sellers failed to hold the price below the neckline. The sustained break back above the neckline is your cue to look for long (buy) setups.
And you would’ve been right to do so, considering the 800 pip rally that followed.
You’ll also notice that the bearish head and shoulders morphed into its inverted counterpart. It’s rare, but it can happen, and it’s why these failed patterns can be worth your time.
Follow the above steps to enter, set your stop, and mark potential targets. Trust me when I tell you that adding failed breaks to your trading arsenal is a smart move.
What’s Next?
Now that you’re a head and shoulders trading guru, let’s talk about other ways to level up your trading. One of the best ways is to take advantage of failed breakouts.
Although patterns like the head and shoulders can be reliable if traded correctly, markets don’t always play nice.
Sometimes, the neckline break doesn’t hold, leaving you with a loss.
I used to get frustrated by these situations until I realized there was a reason behind them, and better yet, it was predictable.
Frequently Asked Questions
What is a head and shoulders pattern in trading?
A head and shoulders is a reversal chart pattern that develops as buyers or sellers begin to fatigue.
How reliable is the head and shoulders pattern?
It’s reliable if traded correctly. Namely, ensuring it’s a valid pattern, using a higher time frame, and waiting for the market to confirm the break.
Is a head and shoulders bullish or bearish?
It can be both. A “standard” head and shoulders pattern is bearish, while the “inverse” head and shoulders is a bullish pattern.
How do I draw the neckline in a head and shoulders pattern?
The neckline connects the low point after the left shoulder and the low point before the right shoulder.
What are the best time frames to use for trading the head and shoulders?
In my experience, the 4-hour, daily, and weekly time frames are best for trading the head and shoulders pattern.
Can a head and shoulders pattern fail? What should I do if it does?
Yes, any chart pattern or trading strategy can and will fail at times. However, a failed head and shoulders is one of the best continuation patterns I’ve found in over 10 years of trading. So if one fails, it’s probably an indication that the trend will continue.
Should beginners trade the head and shoulders?
It’s a beginner-friendly chart pattern, so yes. Make sure you follow the rules in this blog post, and you’re good to go.