Head and shoulders
A reversal pattern that can form at the end of an uptrend: three peaks, the middle one highest, sitting on a line called the neckline.
What the pattern is.
Three peaks that can show an uptrend running out of buyers.
A head and shoulders is a classical chart pattern. It forms after a rise and can mark the point where an uptrend turns down.
It has three peaks. The left shoulder comes first. The head rises above it. The right shoulder follows, lower than the head and often close to the left shoulder in height.
A line through the two dips between the peaks is called the neckline. The pattern is only complete when price closes below that line.
How the pattern forms.
Five stages, in order. The pattern is not finished until the last one.
An uptrend.
The pattern needs a rise before it. Without one, there is no trend to reverse.
The left shoulder.
Price makes a high, then pulls back. So far this looks like any normal pause in a trend.
The head.
Price rallies to a higher high, then falls back to around the level of the first dip.
The right shoulder.
Price rallies again but stops below the head. That lower high is the first sign buyers may be tiring.
The neckline break.
Price closes below the line through the two dips. This close is what confirms the pattern.
Some traders estimate how far a completed pattern might run. They measure from the top of the head down to the neckline, then project that distance down from the break.
Projected level = neckline at the break − pattern height
This projection is a rule of thumb, not a level the market has to reach. Price can stop well short of it or run far beyond it.
How to read it.
What traders look at once the shape appears. None of it is a signal on its own.
The neckline close.
Until price closes below the neckline, there is no pattern. Many shapes that look like a head and shoulders never break the line.
The slope of the neckline.
The neckline can be flat or tilted. Some traders read a neckline that slopes down as a sign sellers were already gaining ground.
Volume.
Traders often look for volume to fade on the right shoulder and pick up on the break. On FX and CFDs, MT5 shows tick volume, the number of price changes.
The retest.
After the break, price sometimes rallies back to the neckline before falling again. The old support can act as resistance, or the break can fail.
The inverse pattern.
The mirror image forms after a downtrend: three lows, the middle one lowest. It is confirmed by a close above its neckline.
Common mistakes.
Where traders new to the pattern most often go wrong.
Acting before the neckline breaks. Until price closes below it, the shape is only a possible pattern.
Seeing the pattern everywhere. Almost any three peaks can be squeezed into the shape. Look for a clear uptrend before it and a clear neckline.
Treating the projected level as a promise. The measured move is a rough guide, and price often stops short of it.
Forgetting the timeframe. A pattern on a five-minute chart reflects a few hours of trading. One on a daily chart reflects months.
Trading without a plan for failure. Many breaks fail and price returns above the neckline. Decide where your idea is wrong before you trade.
Drawing it on MetaTrader 5.
MT5 has no head and shoulders indicator. You draw the neckline yourself with a trend line.
Find the shape on a chart.
Open the instrument and timeframe you want to study. Look for three peaks after a clear rise.
Draw the neckline.
Go to Insert, then Objects, then Lines, and choose Trend Line. Click the first dip, then drag to the second dip.
Extend the line.
Right-click the line, open its properties and tick the option to extend it to the right. It then shows where a break would happen.
Measure the height.
Use the crosshair to measure from the top of the head down to the neckline. Note the distance before price reaches the line.
Questions, answered.
What traders ask most about the head and shoulders pattern.
01What does a head and shoulders pattern show?
02What is an inverse head and shoulders?
03How long does the pattern take to form?
04What if price breaks the neckline, then closes back above it?
05Can I practise spotting it first?
Practise it on a demo.
Draw necklines on a free MT5 demo and watch how the patterns play out before you trade with real money.
Trading CFDs on a live account puts your capital at risk and you can lose money. A demo does not.