The Head and Shoulders Pattern

A Head and Shoulders pattern is defined by one peak, followed by a higher peak, which is then followed by a lower peak, and finally a break below the support level established by the two troughs formed by the pattern.

As you can see from the above chart a head and shoulders pattern is basically showing the buyers trying 3 times unsuccessfully to take the market higher before finally giving way to the sellers who theoretically retain control after the 3rd failure. The head and shoulders pattern is thus seen as a potential reversal pattern and day traders will pay special attention to this pattern when it occurs on an uptrend, and will look to trade a potential reversal of the uptrend should the pattern play out. For further confirmation that the potential for a reversal is high traders often give more credibility to a falling neckline than they do a rising neckline.

The reverse head and shoulders is basically a mirror image of the head and shoulders pattern and is defined by one trough, followed by a second lower trough, which is then followed by a third higher trough, and then finally a break above the resistance level established by the two peaks formed by the pattern.

As you can see from the above chart, the reverse head and shoulders is basically showing the sellers trying 3 times unsuccessfully to take the market lower before finally giving into the buyers who theoretically retain control after the 3rd failure. Like the Head and Shoulders Pattern, the Reverse Head and Shoulders is seen as a reversal pattern, and traders of the stock, futures and forex markets will pay special attention to this pattern when it occurs as part of a downtrend should the pattern play out. For further confirmation that the potential for a reversal is high, day traders will look for a rising neckline.

Head and shoulders tops and bottoms are reversal patterns, which can develop at the end of bullish or bearish trends. Trying to pick top or bottom is a foolish game for almost all of us. Unless you have skills like Paul Jones, you should avoid these patterns.