A head and shoulders pattern is a technical analysis formation that signals a potential trend reversal. It consists of three distinct peaks. The middle peak, known as the head, is the highest point. The two surrounding peaks, called shoulders, are lower and roughly equal in height. These peaks sit above a common support level known as the neckline.
Traders identify the pattern after an extended bullish trend. The first shoulder forms as the price rises and then pulls back. The head forms when the price rallies to a new high before declining again to the neckline. The second shoulder forms when the price rises to a level similar to the first shoulder but fails to reach the height of the head. The pattern is considered complete when the price breaks below the neckline.
Volume often plays a key role in confirming this formation. Trading volume typically decreases as the price forms the head and the second shoulder. A significant spike in volume during the neckline breakout adds credibility to the signal. Always remember that technical patterns are not foolproof indicators. Trading involves substantial risk of loss, and past performance does not guarantee future results.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.