Head and shoulders (and inverse)

Three peaks, middle is tallest

Head and shoulders is the most famous chart pattern in technical analysis. It sits at the top of an uptrend and warns that buyers are running out of fuel. The shape has three peaks. The middle peak is the tallest. The two outer peaks are roughly the same height as each other but lower than the middle. Picture a person seen from the front. Left shoulder, head, right shoulder. That is exactly the visual the pattern is named after.

Connect the two valleys between the peaks. That line is called the neckline. It does not have to be perfectly flat. It can tilt up a little or down a little. The neckline is the trigger level. If price drops down and closes through it, traders say the pattern is confirmed. Until the neckline breaks, you have a shape on a chart but no trigger.

The inverse head and shoulders is the same shape flipped upside down. It forms at the bottom of a downtrend. Three valleys. The middle valley is the deepest. The two outer valleys are roughly equal and shallower. The neckline runs across the two peaks between the valleys. A close above the neckline is the trigger. The logic is symmetric. Sellers exhausted themselves trying to push price lower three times and only the middle attempt got real follow through.

Honest reality check before we go further in this chapter. Pattern books often quote win rates around 55 to 65 percent for head and shoulders. Those numbers come from cherry-picked datasets and rarely survive proper out-of-sample testing. The real edge is not the shape itself. It is the context. A head and shoulders at the top of a long uptrend, into a higher timeframe resistance, with volume drying up into the right shoulder, has a different statistical profile than the same shape printed inside a chop range on a 5-minute chart. We will keep coming back to that point in the rest of this chapter.

Recap: head and shoulders is three peaks with the middle tallest, completed on a neckline break. Inverse is the same shape flipped at a downtrend bottom. Context matters more than the shape alone.