Head and Shoulders

Head and shoulders pattern (HAS)

The head and shoulders (HAS) formation is a pattern which appears on the charts as a “neckline” with three distinct peaks. The outside “shoulders” are close in height and the middle peak, the “head”, is the highest.

This pattern is typically believed to indicate a trend reversal, specifically a bullish-to-bearish trend reversal. The HAS is often regarded as one of the more reliable and tested of chart patterns. 

Trading with HAS formations

First we need to understand what the HAS formation tells us. If it is being used to signal a trend reversal then we know we are currently in the midst of a bullish trend. The price peaks and then the sellers take control and drive the price down to the neck line. This process repeats until the third price drop in which case the support crumbles and the current trend is reversed. 

This tells us the buyers have temporarily left the market and the price will continue to decline. If you are long in a position and want out, this is your signal. If you intend to take a short position this is your signal too!



Inverse Head and Shoulders

Another method of trading utilizing the head and shoulders chart formation is to use the inverse head and shoulders pattern. In this situation, during a downtrend the price reaches three consecutive lows which are punctuated by temporary rallies. The second low will be the lowest, with the first and third being shallower. The final push by the bulls breaks through the “neckline” or previous resistance and often signals a downtrend reversal.



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