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Technical Analysis · Intermediate · 5 min

Head and shoulders

You can identify a head and shoulders pattern, draw its neckline, explain the measured-move target and say what research found about it.

The famous one

If people know one chart pattern by name, it is usually this one. Two shoulders, a head between them, a neckline below. It appears in textbooks, news articles and countless social media posts.

It is also one of the few chart patterns that economists have tested seriously. This lesson explains how it is defined, how the classic target is calculated, and what the research found.

Three peaks, one neckline

A head and shoulders top is a reversal pattern after an uptrend. It has three peaks:

  1. Left shoulder: a rally and a pullback.
  2. Head: a higher rally and a pullback to roughly the same area.
  3. Right shoulder: a weaker rally that stays below the head, roughly level with the left shoulder.

The neckline connects the two lows between the peaks. It can be horizontal or slightly sloped.

Candle chart A head and shoulders top: a left shoulder at 105.37, a higher head at 108.05 and a right shoulder at 105.56. The neckline runs through the lows at 101.47 and 102.01. Candle 31 closes below it at 101.60. The measured target is near 96. LS Head RS Neckline Target 96

In terms of the trend lessons, the right shoulder is a lower high, and the neckline marks the last higher lows. The pattern is considered complete only when the price closes below the neckline. Until then, it is a possibility, and many such shapes never complete.

The classic target, described in Edwards and Magee's 1948 textbook, is a measured move: take the height from the head to the neckline and project it down from the point where the price breaks the neckline. An inverse head and shoulders after a downtrend works the same way upside down.

What does research say? Carol Osler and Kevin Chang tested the pattern on daily exchange rates of major currencies from 1973 to 1994, using an objective computer algorithm based on textbook rules. The rule was profitable, but it was dominated by simpler trading rules, so the authors did not see it as an efficient strategy. Lo, Mamaysky and Wang, studying US stocks from 1962 to 1996, found that some patterns including this one provided incremental information. Neither study suggests that the pattern is reliable on its own.

Target about 96

Follow the fictional chart.

The head is about 6.3 points above the neckline. Projected down from the break at about 102.40, the measured target is roughly 96. By the end of the chart, the price has reached 97.90. The target may be reached later, or never. A trader using the pattern would place a stop above the right shoulder, where the pattern would be clearly invalid.

Common mistakes

The takeaway

A head and shoulders is three peaks, the middle one highest, with a neckline under them. A close below the neckline completes it.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

  1. 1Tap the neckline.

    Tap the chart.

    Candle chart Chart for the question: Tap the neckline. Neckline

    The neckline connects the lows between the shoulders and the head: 101.47 and 102.01.

  2. 2When is a head and shoulders top usually considered complete?

    Before the close below the neckline, the shape is only a possible pattern. Many never complete.

  3. 3How is the classic measured-move target calculated?

    Here about 6.3 points, from 108.05 to the neckline near 101.7, projected down from about 102.4: roughly 96.

  4. 4What did Chang and Osler find when they tested the pattern on exchange rates from 1973 to 1994?

    Their study found profits, but the rule was dominated by simpler ones, so it was not efficient.

of 4 correct.

Sources

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