What Is a Head And Shoulders Pattern?

A head and shoulders pattern is a chart formation that consists of a baseline with three peaks, the outside two of which are similar in height and the central peak being the tallest. A head and shoulders pattern is a chart structure that forecasts a bullish-to-bearish trend reversal in technical analysis.
One of the most dependable trend reversal patterns is the head and shoulders pattern. It’s one of the numerous top patterns that, to various degrees of accuracy, indicate the conclusion of an upward trend.

Head and Shoulder pattern is a type of reversal pattern which indicates a potential change in the current trend prevailing in the market. It consists of three troughs with the centre one slightly deeper one, known as “head” accompanied by the two side troughs of almost same level known as “shoulders”.

This pattern can be formed in two ways:

Head and shoulder top

  • It is formed after an uptrend.
  • Existence of a prior uptrend is essential for its formation.
  • Support is broken and price breaks down to reverse the trend in the downward direction

Head and Shoulder bottom

  • Formed at the bottom of the chart i.e. after a downtrend.
  • Existence of a prior downtrend is essential for its formation
  • Resistance is broken and price breaks out above to reverse the trend in the upward direction