Head and Shoulders Reversals: Breakouts, Stops, and Price Targets
Summary
The document explains the head and shoulders top and its inverse as chart patterns that may mark a change in trend. A top forms after an advance with three peaks and a highest middle peak; an inverse pattern forms after a decline with three troughs and a lowest middle trough. Traders identify a neckline from the intervening swings and treat a break of that level, or a nearby swing point for some neckline slopes, as confirmation. The suggested stop is beyond the right shoulder.
It estimates targets by measuring pattern height and projecting that distance from the breakout, with a percentage-based alternative when a downside target would be unrealistic. The explanation gives illustrative calculations and a rationale based on shifts in swing highs and lows, but no performance study. Breakouts can retrace, targets may not be reached, and the pattern’s reward relative to stop risk can be modest; the document advises assessing trade quality before entry and treating targets as estimates.
Key ideas
- A head and shoulders top may signal a reversal after an advance, while the inverse pattern may signal a reversal after a decline.
- The neckline break serves as the pattern’s completion signal, with the precise trigger depending on neckline slope.
- Stops are placed beyond the right shoulder to allow for price movement around the breakout.
- Pattern height can be projected from the breakout to estimate a target, though an alternative percentage method may be more realistic in some cases.
- Targets are uncertain, and the potential reward may be only modestly larger than the risk.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.