Head and Shoulders Chart Pattern

The head and shoulders is a reversal pattern, meaning that it usually comes before a reversal in a trend. Like other chart patterns, the head and shoulders can be bullish or bearish, depending on how it appears in the chart.

The head and shoulders chart pattern is made up of three different points, as well as a neckline:

As you can see, the head and shoulders formation has either three peaks, or three dips. The middle peak or dip should be the largest, and the two surrounding shoulders should be roughly the same size, but smaller than the head of the pattern.

Bearish Head and Shoulders

A bearish head and shoulders looks like the following:

In this example, you can see that the price was rising into the pattern before three tops were made to form the head and shoulders. Once complete, the price of the currency pair fell below the neckline to an amount equal to the distance from the neckline to top.

Bullish Head and Shoulders

Also known as an inverted head and shoulders pattern, the bullish head and shoulders is upside down. The shoulders are made up of two dips in price, while the head is made up of a larger dip.

Just like the bearish chart pattern, the bullish pattern is usually good for an increase in price equal to the distance from the bottom of the head and shoulders pattern to the neckline.

A seasoned trader would notice this head and shoulders pattern and place an entry order just above the neckline to ride the momentum through the neckline for a large profit.

Now that you have worked your way through a number of different technical chart patterns, they should be getting easier to see on a forex chart. In the next tutorial on the cup and handle pattern, we’ll look at another chart pattern that has been known to produce big winners in the foreign exchange market