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Key Takeaways
- The classic top consists of three peaks where the center peak, the head, stands above two roughly equal shoulders.
- The neckline connects the two troughs between the peaks, and the pattern is only complete when price breaks that line.
- The conventional measured target is the head-to-neckline distance projected from the neckline break.
- The inverse has three troughs with the middle lowest and activates above a neckline connecting the intervening peaks.
- Measure the head-to-neckline height and project it from the neckline at the break: $113 − $100 = $13 puts this top’s target at $87.
What is a head and shoulders pattern?
A head and shoulders pattern is a reversal chart pattern of three peaks after an advance, in which the middle peak, the head, stands above the two shoulders. The neckline connects the two troughs between the peaks, and the setup activates when price breaks below it. The inverse head and shoulders mirrors it after a decline, with three troughs and a neckline through the intervening peaks.
Mark those five swings and select the price event that activates the breakout setup.
Formula
Top height = head high − neckline at head; inverse height = neckline at head − head low; top target = neckline at break − top height; inverse target = neckline at break + inverse height- Evaluate the neckline at the head observation to calculate the positive pattern height.
- For a top, the neckline lies below the head; for an inverse, it lies above the head.
- Evaluate the neckline again at the breakout observation to obtain the projection anchor.
- The neckline at the break anchors the target, while the breakout close and your fill set the trade’s actual entry.
Head and shoulders example: target, entry and stop
XYZ advances into a $107 left shoulder, $113 head and $106 right shoulder. Both intervening troughs are $100, defining a flat neckline. The breakdown closes at $99.40, and the short enters there with a $106.20 stop above the right shoulder.
- Pattern height: $113.00 head minus $100.00 neckline = $13.00
- Measured target: $100.00 neckline minus $13.00 = $87.00
- $99.40 short entry and $106.20 stop give $6.80 of risk
- Entry-to-target distance is $99.40 − $87 = $12.40; $12.40 / $6.80 = 1.82
The example retests $100.20, briefly above the neckline, then moves to $96 and continues to $87.60, finishing $0.60 above the $87 objective. A neckline-reclaim exit risks a shakeout on the $100.20 retest, while the $106.20 shoulder stop holds the trade through it.
The $99.40 close breaks below it. Height is $113 − $100 = $13, and the neckline-anchored objective is $100 − $13 = $87.
Short at $99.40 with a stop at $106.20 above the right shoulder. The risk is $6.80 a share, and the $12.40 distance to target gives a 1.82 ratio.
The example retests $100.20, then moves to $96 and reaches $87.60. The retest briefly crosses the neckline, which can shake out a neckline-reclaim exit while the $106.20 shoulder stop holds the short.
Compare participation with Relative Volume. Build a put or put spread in the Options Profit Calculator and read its payoff at the $87 objective, its loss at the $106.20 stop and the breakeven between them.
Inverse head and shoulders example
The reflected example has a $93 left shoulder, $87 head and $94 right shoulder under a flat $100 neckline. The $100.60 close activates above the line.
Height is $100 − $87 = $13. Add that positive distance to the neckline for a $113 target. A $100.60 entry with a $93.80 stop gives the same $6.80 risk and $12.40 distance to target.
The example returns to $99.80 and then advances to $112.40, finishing $0.60 below the objective.
How to measure a sloping neckline
For a separate sloping example, connect observation 7 at $100.50 with observation 13 at $100. The line falls $0.50 across six observation intervals.
At a head on observation 10, neckline value is $100.25. With a $113 head, height is $12.75. At a breakout on observation 18, neckline value is $99.58, giving a target of $99.58 − $12.75 = $86.83.
Reading the line at the head sets the height, and reading it at the break sets the anchor. An inverse uses the same two readings with its neckline-minus-head distance.
Limitations of the head and shoulders pattern
- Wait for the neckline break. Until price breaks the line, the three peaks can resolve upward and the setup never activates.
- Anchor the neckline before the break. Which troughs anchor it, and whether it slopes, change both the height and the target.
- Use the shoulder stop to hold through a retest. Retests can cross the neckline, as the $100.20 retest does here, and a neckline-reclaim exit can close a trade that later moves toward the objective.
- Scale out near the target. The top example stops at $87.60, $0.60 short of $87, and other charts can run past it.
- Give an option trade time. The pattern measures distance and leaves the timing open, so choose an expiration that covers a slow move to the target.
Bottom line
A head and shoulders pattern marks an advance that could not extend past its head, with the neckline break activating the reversal and the head-to-neckline height setting a measured target. Choose the break event and stop reference before the break, evaluate a sloping neckline at both the head and the breakout, and size from the stop distance.
Clear answers
Frequently Asked Questions
Sources and Further Reading
- Fidelity: Identifying Chart Patterns (Brokerage Technical Analysis)
- Fidelity: Identifying Chart Patterns With Technical Analysis (transcript)
How entries are sourced, calculated and updated: editorial methodology.