The head and shoulders is the most widely watched reversal pattern in technical analysis. It marks the transition from an uptrend to a downtrend through three distinct peaks: a left shoulder, a higher head, and a right shoulder roughly level with the first.
The line connecting the two troughs between these peaks is the neckline. As long as price holds above it, the pattern is still forming. The signal fires on a decisive close below the neckline — ideally on expanding volume.
Each peak represents a failed attempt by buyers to push price higher. The lower right shoulder reveals that demand is exhausting itself: buyers can no longer manufacture a new high. When the neckline breaks, the traders who bought the head and right shoulder are now underwater and become forced sellers.
Tag the trade with the pattern, log your neckline level as the stop reference, and record the measured-move target. After the trade closes, your post-mortem should answer one question: did the neckline break hold, or did you get faked out by a throwback?
Put this pattern to work in your own journal.
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