<p>The <strong>Head and Shoulders</strong> pattern is a well‑known chart formation that signals a potential <a href="/NewSite/encyclopedia/reversal/" class="ency-link">reversal</a> of an uptrend, consisting of three successive peaks where the middle peak (the head) stands higher than the two outer peaks (the shoulders). Traders interpret this shape as a warning that buying momentum is weakening and that a downtrend may follow once the price breaks below the supporting <strong>neckline</strong> that connects the lows between the peaks.</p>

<h2>How It Works</h2>
<p>The pattern develops in four stages. First, the price rises to form the left shoulder, then pulls back to a trough. Second, it advances to a higher peak—the head—before retracing again to a similar trough level. Third, a modest rally creates the right shoulder, which usually peaks near the height of the left shoulder but never exceeds the head. Finally, when the price falls and closes below the <a href="/NewSite/encyclopedia/neckline/" class="ency-link">neckline</a>, the formation is considered complete, suggesting a shift from bullish to bearish sentiment. Volume often corroborates the pattern: higher volume on the left shoulder and head, diminishing volume on the right shoulder, and a surge in selling volume as the price breaches the neckline.</p>

<h2>Why It Matters for Traders</h2>
<p>Recognizing a Head and Shoulders setup allows traders to anticipate trend changes before they fully materialize, providing an opportunity to exit long positions or initiate short trades. The neckline acts as a clear, objective level for stop‑loss placement, while the measured move—calculated from the distance between the head’s peak and the neckline—offers a realistic profit target. Because the pattern appears across timeframes and instruments, it is a versatile tool in a trader’s technical arsenal, especially when combined with other indicators such as moving averages or RSI to filter false signals.</p>

<h2>Example</h2>
<p>Assume a stock is trading at $50 and forms a Head and Shoulders pattern. The left shoulder peaks at $55, the head reaches $62, and the right shoulder tops at $56. The neckline, drawn through the troughs at $50 and $52, sits around $51. When the price closes below $51, the pattern is confirmed. The height from the head ($62) to the neckline ($51) is $11. Subtracting this from the breakout level gives a target of $40 ($51 − $11). A trader might enter a short position at $50.50, set a stop‑loss just above the right shoulder at $57, and aim for the $40 target, yielding a potential reward‑to‑risk ratio of roughly 2:1.</p>

<h2>Key Takeaways</h2>
<ul>
<li>The <strong>Head and Shoulders</strong> pattern comprises three peaks with a higher middle peak and a neckline that, when broken, signals a bearish reversal.</li>
<li>Volume confirmation and a clear break below the neckline increase the reliability of the signal.</li>
<li>Traders use the pattern to set entry points, stop‑loss levels, and profit targets based on the measured move from head to neckline.</li>
<li>The formation is applicable across various assets and timeframes, making it a staple in technical analysis on platforms such as MetaTrader 5.</li>
</ul>