What the head and shoulders pattern looks like
- Left shoulder: an uptrend makes a high, then pulls back.
- Head: price rallies to a higher high, then falls back to around the same area as the first pullback.
- Right shoulder: a weaker rally makes a lower high, roughly level with the left shoulder.
- Neckline: the line through the two lows between the peaks. It can be flat or slope a little either way.
The pattern only exists once price closes below the neckline. Before that, it's three peaks in an uptrend, and plenty of those turn into a continuation instead.
How to find the head and shoulders target
Target = Neckline − (Head − Neckline)
Measure the height from the top of the head straight down to the neckline, then project the same distance down from the point where price breaks the neckline. In the example in the calculator, the head is at 4,300.00 and the neckline at 4,200.00, a height of 100.00, so the target is 4,200.00 − 100.00 = 4,100.00.
With a stop just above the right shoulder at 4,256.00 and an entry at the neckline, the risk is 56.00 for a reward of 100.00, about 1 : 1.79. On gold that's $5,600 of risk per standard lot.
If the neckline slopes, measure the height from the head to the neckline directly below it, and project it from the level where price actually breaks. Treat the target as a zone, not a precise price: many traders take part of the position off before it, at the next support level.
Three ways to enter
| Entry | How | Trade-off |
|---|---|---|
| Breakout | Sell when a candle closes below the neckline | You're in early, but more of these fail |
| Retest | Wait for price to come back up to the broken neckline and reject it | Better price and confirmation, but many breakouts never retest |
| Right shoulder | Sell as the right shoulder rolls over, before the break | The best price and the smallest stop, but the pattern isn't confirmed yet |
The stop usually goes just above the right shoulder. A stop above the head is safer but often makes the risk too big for the target to be worth it.
Inverse head and shoulders
The same pattern upside down, at the end of a downtrend: a low, a lower low for the head, then a higher low for the right shoulder, with a neckline across the two highs between them. It's bullish. The target is the neckline plus the height: with a neckline at 4,200.00 and a head at 4,100.00, it's 4,200.00 + 100.00 = 4,300.00. Switch the calculator to "Inverse" to work it out.
What makes the pattern stronger or weaker
- A clear trend before it. A head and shoulders top needs an uptrend to reverse. Without one it's just a range.
- A right shoulder lower than the left one. It shows buyers couldn't even get back to the first peak.
- A decisive close through the neckline, not just a wick through it, on the timeframe you're trading.
- The higher timeframe. A top on the hourly chart that forms right at daily support often fails.
- Volume, where it's real. Stock and futures traders like to see volume fall on the right shoulder and rise on the break. Spot forex has no central volume, so the tick volume your broker shows is only a rough guide.
When the pattern fails
If price breaks the neckline and then closes back above the right shoulder, the pattern has failed, and failed patterns can move hard the other way as everyone who sold gets stopped out. That's why the stop belongs beyond the right shoulder, not somewhere in the middle of the pattern. Size the trade so that losing it costs the same small share of your account as any other trade: the lot size calculator turns your stop into a lot size.
Head and shoulders on forex and gold
The pattern appears on every market and timeframe. On forex pairs and XAUUSD it's most useful on the 1-hour to daily charts, where each peak is built over many sessions. On very short charts the three peaks are often just noise between news releases. Combine the target with other levels, such as Fibonacci retracements or pivot points, and take profit at whichever comes first. For single candles that often mark the shoulders and head, see candlestick patterns, and for reading trend and levels, price action trading.