A peak, a higher peak, a peak again:three bumps that mark a turning, now and then.
A chart pattern consisting of three peaks: a higher middle peak (the head) flanked by two lower peaks (the shoulders).
It is traditionally read as a sign that a rising trend may be losing strength; like every chart pattern it is a matter of interpretation and often fails.
In plain words
Head and shoulders is the name for a chart shape with three peaks: a middle peak, the head, that is higher than the peak on either side, the shoulders. A line drawn through the two low points between the peaks is called the neckline.
See it move
Reached: Right shoulder
Why it matters
Chart readers treat it as a possible sign that a rising trend is running out of strength, and many regard the pattern as complete only when the price falls below the neckline. Like every chart pattern it is a matter of interpretation, and it often fails.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
An invented price rises to three peaks with two dips between them.
- 1Left shoulder peaks at 1.2100, then the price dips to 1.2000
- 2Head peaks at 1.2200, then the price dips to 1.2000
- 3Right shoulder peaks at 1.2100
- 4The neckline joins the two dips at 1.2000
The shape is a head and shoulders; by the usual reading it is complete only if the price then closes below 1.2000.
A common mistake
Three bumps on a chart are easy to see afterwards and easy to imagine beforehand. Until the neckline breaks the pattern is unfinished, and even a break can be followed by a recovery.
Check yourself
Educational information, not investment advice or a recommendation to trade.