How to Trade a Head and Shoulders Pattern (Step by Step)

The head and shoulders pattern is a reversal formation that signals the end of an uptrend and the start of a downtrend. The inverse version (also called inverted head and shoulders) signals the end of a downtrend and the start of an uptrend. It's been documented in trading books for over 100 years and remains one of the most reliable single patterns in technical analysis — partly because it makes intuitive sense and partly because so many traders watch for it that it becomes self-fulfilling. The shape: three peaks. The middle peak (the head) is higher than the two outer peaks (the shoulders). The two shoulders are roughly the same height. A line drawn across the lows between the peaks is called the neckline — it's usually horizontal but can be slightly sloped. When price forms the right shoulder and then breaks below the neckline, the pattern triggers and the reversal is confirmed. The expected target is roughly equal to the height from the head to the neckline, projected downward from the breakout point. Why it works: each peak represents an attempt by buyers to push higher. The first shoulder is a normal pullback in an uptrend. The head is buyers trying again, succeeding briefly, then losing momentum. The right shoulder is buyers trying a third time but failing to even reach the previous high — that lower high is the early signal that the trend is dying. When the neckline finally breaks, the last group of buyers gives up, sellers take over, and the move is on. This same psychology plays out across all timeframes and instruments. The trade entry: there are two schools. The aggressive entry is on the break of the neckline — you short as soon as price closes below the neckline on the timeframe you're trading. Tighter stop, sometimes catches the move from a better price. The conservative entry is on the retest — wait for price to break the neckline, then pull back and retest it as resistance, then short on the rejection. Lower probability of catching the move (sometimes price doesn't retest) but higher probability of being right when it does. The Candleread desk usually uses the retest entry on swing trades and the breakout entry on intraday. Where the stop goes: just above the right shoulder for longs (inverse head and shoulders), or just above the right shoulder for shorts (regular head and shoulders). This is the level that invalidates the pattern. If price breaks back above the right shoulder, the reversal failed and you should be out. Risk-reward on a clean head and shoulders is usually 1.5-3:1, which is healthy.