The head and shoulders is the best-known reversal pattern, and it is a reasonable place to start because its logic is easy to state: buyers pushed twice and failed, pushed a third time even harder and still failed, and then lost the floor.
The three parts
- Left shoulder: a rally in an existing uptrend, then a pullback.
- Head: a stronger rally to a higher high, then a pullback to roughly the same area as the first.
- Right shoulder: another rally, but this one fails to reach the head. Then price falls through the neckline.
The neckline is drawn through the two pullback lows. It does not have to be flat — a sloping neckline is normal — but a flat one is easier to trade because there is no ambiguity about where it is.
What it is actually telling you
The right shoulder failing to exceed the head is the important part. It says the third attempt had less participation than the second. Combine that with a floor that has now been tested twice, and the sellers only need one good session to break it.
Note what is not required: the two shoulders do not need to be equal, and the neckline does not need to be horizontal. Textbook diagrams are cleaner than real charts, and waiting for a textbook version means waiting forever.
Confirmation
The pattern is not complete until price closes below the neckline. A wick below is not confirmation. Many head and shoulders formations never break the neckline at all and simply turn into a sideways range — which is a perfectly normal outcome and one you should be ready for.
Where the idea dies
If price closes back above the right shoulder's high, the structure is invalid. There is no head and shoulders any more; there is a market making higher highs.
How to check this yourself
Find five head and shoulders formations on historical charts — use a daily index chart and scroll back a couple of years. For each one, write down: did the neckline break, how far did price travel after the break in relation to the pattern height, and how long did it take? You will find a spread of outcomes, which is the honest picture, rather than the one or two dramatic examples in most books.