Chart pattern: Head and shoulders (H&S)
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What is a Head and Shoulders pattern (H&S)?
A Head and Shoulders pattern is a trend reversal chart pattern.
This chart pattern is certainly the most well-known to investors and this is what makes them successful.
The principle of the pattern is identical to that of a triple top, except that the second top is higher than the other two.
In theory, the height of both shoulders should be the same, and the neck line should be horizontal.
In practice, the shoulders are often not of the same height, or the neck line ascends or descends (depending on the shape of the shoulders in the pattern).
Formation of a head and shoulders pattern
The first and third peaks (approximately the same height) form the shoulders.
The second peak (higher than that of the shoulders) forms the head.
There is no fixed rule, but some authors consider that the head height should be 1.5 to 2 times higher than that of the shoulders.
It is also agreed that the spaces between each peak must be identical to validate the head and shoulders pattern.
The neck line is determined by the two lowest points reached after the first shoulder and the head. These two low points are not always at the same level; the neck line can therefore be upward (52% of cases), downward (43% of cases) or horizontal (10% of cases).
The head and shoulder pattern is definitively validated at the break out point of the neck line.
The price objective is equal to the height between the neck line and the top of the head, plotted below the neck line.
Graphical representation of a head and shoulders pattern
Statistics of head and shoulders patterns
- In 93% of cases, the exit from the head and shoulders pattern is bearish.
- In 63% of cases, the price reaches the objective of the head and shoulders pattern when the neck line is broken.
- In 96% of cases, the bearish movement continues at the break in the neck line.
- In 45% of cases, after exiting, the price makes a pullback in resistance on the neck line of the head and shoulders pattern.
Notes on the head and shoulders pattern
- The longer the movement before the formation of a Head and Shoulders (H&S) pattern is, the more forceful the bearish movement at the break of the neck line will be.
- The more abrupt the movement before the formation of a Head and Shoulders (H&S) pattern, the more forceful the bearish movement at the break of the neck line will be.
- Head and shoulder patterns with an upward neck line offer better performance.
- If the left shoulder is higher than the right shoulder, the head and shoulder pattern offers better performance.
- After exiting the head and shoulders pattern, pullbacks in resistance on the neck line are detrimental to performance.
For your information: The head and shoulders pattern (H&S) is a reversal chart pattern. Its opposite pattern is an inverse head and shoulders (H&Si).
