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Whale Trading

Head and Shoulders: Classic Reversal Pattern and Its Failures

The head and shoulders (H&S) pattern is one of the most widely known
reversal structures in technical analysis.

  • A head and shoulders top usually appears after an uptrend,
    with three highs where the middle one (the head) is the highest.
  • An inverse head and shoulders appears after a downtrend,
    with three lows where the middle one is the deepest.

In both cases the message is:

“The side that has been in control is
gradually running out of strength.”

The diagram below shows a textbook head and shoulders top
and an inverse head and shoulders, with
the neckline and prior trend direction highlighted.

1. Structure: Why Three Swings?

1-1. Left Shoulder → Head → Right Shoulder

Seen through swing-vs-correction,
a head and shoulders top develops roughly as:

  1. Left Shoulder

    • A normal upswing high in an ongoing uptrend.
    • A pullback creates a swing low.

  2. Head

    • Buyers step back in and push to a new higher high.
    • Up to this point, the structure still looks like
      a standard trend continuation.

  3. Right Shoulder

    • After another pullback, price tries to rally again,
      but this time fails to reach the head.
    • This reflects fading upside pressure and
      stronger willingness to sell near prior highs.

Three swings together create the familiar
“three peaks with the middle one highest” look.

1-2. Inverse Head and Shoulders

The inverse pattern mirrors this logic in a downtrend:

  • Left shoulder: a normal downswing low.
  • Head: a lower low, extending the downtrend.
  • Right shoulder: a final push lower that fails to make a new low.

Often:

  • Lows become less aggressive, and
  • Reaction highs climb higher,

hinting that downside pressure is losing dominance
and upside potential is building.

2. Neckline and Position in the Trend

2-1. Drawing the Neckline

The neckline is drawn as:

  • Top pattern: a line through the two swing lows
    between left shoulder–head and head–right shoulder.
  • Inverse pattern: a line through the two reaction highs.

It matters because:

  1. Structural boundary
    • Until price breaks and closes beyond the neckline,
      the pattern is only potential, not confirmed.
  2. Risk framework
    • Entries near the neckline make it easier
      to place stops and targets in a structured way,
      in line with risk-management.

2-2. Where in the trend does it form?

Context from
s-r
and swing-vs-correction is crucial.

A head and shoulders top has more weight if:

  • It appears late in a long uptrend.
  • The head or shoulders line up with a major weekly/monthly resistance.
  • Volume on the head and right shoulder
    looks less aggressive than on earlier rallies.

If it appears early in a new trend,
or inside a higher-timeframe range,
the same three-peak structure may just be
a complex consolidation, not a major top.

For an inverse H&S, look for:

  • Extended downside before the pattern.
  • Lows forming near strong support on higher timeframes.
  • The head showing long lower wicks and heavier volume
    (sign of demand).

3. Volume and the Head and Shoulders Pattern

Textbooks sometimes specify strict volume rules.
In live markets, it is more practical to look for general tendencies.

3-1. Ideal textbook behaviour

For a top:

  • Volume often declines from left shoulder to head, and
  • expands on the break below the neckline.

For an inverse pattern:

  • Selling volume tends to fade into the head, and
  • buying volume expands on the breakout above the neckline.

3-2. Practical use

In practice, you can focus on:

  • Is volume clearly weaker on the head/right shoulder
    compared with earlier upswings?
    → potential trend fatigue.
  • Is volume clearly higher on the neckline break
    than inside the pattern?
    → higher chance the break will stick.
  • If the snap-back move carries more volume
    than the initial break,
    you may be looking at a failure pattern or trap
    as discussed in failure.

4. Breakouts vs Failure Patterns

As with double tops/bottoms,
the heart of the pattern is:

“What does price do around the neckline?”

The diagram below compares:

  • Left: a clean breakdown from a head and shoulders top.
  • Right: a failed breakdown / bear trap,
    where price dips below the neckline and then rips back above.

A common failure scenario:

  1. Price breaks slightly below the neckline.
  2. The selloff fails to gain distance.
  3. Price reclaims the neckline.
  4. Volume on the snap-back and rally
    is stronger than on the breakdown.

Shorts triggered by the pattern
are forced to cover into the move up,
fueling a squeeze.

Inverse patterns can fail the opposite way:

  • A brief poke above the neckline,
  • followed by a sharp rejection back below,
    trapping late longs.

These behaviours are covered in more detail in
failure.

5. Practical Checklist and Next Steps

Before trading any head and shoulders pattern, ask:

  1. What is the dominant higher-timeframe trend?

    • On daily/4h: uptrend, downtrend, or range?
    • See timeframes.

  2. Where in the swing does this pattern sit?

    • Early/mid/late in the move?
    • Is the trend already extended?

  3. Where is the neckline, and what invalidates the idea?

    • At what price do you say
      “this H&S setup is no longer valid”?

  4. Does volume support the story?

    • Relative volume on head / right shoulder.
    • Volume on the break versus the snap-back.

  5. Does the trade fit your risk plan?

The head and shoulders is visually clear,
which is why it’s often taught early.
But in real markets it interacts constantly with:

Rather than asking “Is this a perfect H&S?”,
focus on:

Who is failing at which level,
and where does real conviction show up in volume?