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GUIDE

Head and shoulders pattern explained, and the inverse head and shoulders

Chart patterns · 6 min read

The head and shoulders is the most widely known chart pattern, and on most charts it is drawn by eye. In SixOne8 it is found by rules, which means it is found the same way every time and can be tested. This guide is the shape those rules look for, what each setting loosens or tightens, and the conditions you can write once a pattern is there.

A head and shoulders: a left shoulder, a higher head and a right shoulder, a neckline through the two troughs, and the bar that closes below the neckline highlighted
Illustrative candles. Left shoulder, head and right shoulder, with the neckline drawn through the two troughs and extended. The highlighted bar is where "price breaks below" the neckline would be true.

What a head and shoulders is

Five swings in a row: a left shoulder (a swing high), a trough, a higher swing high — the head — a second trough, and a right shoulder roughly level with the left. The neckline is the straight line through the two troughs, extended forward; it may slope. The neckline is the level a rule reads, and the head is what ends the pattern: a bar that trades above the head means the shape has failed.

The inverse head and shoulders is the same shape upside down — three swing lows with the middle one lowest, and a neckline through the two peaks above them. Every setting and comparison below has its mirror.

A swing high is a bar whose high stands above the bars either side of it, a set number of bars each way. It is only confirmed once that many bars have closed after it, and it is never revised afterwards. So the pattern is known on the bar the right shoulder is confirmed, a few bars after the shoulder itself — later than a chart drawn by eye, but exactly when an alert could first have read it.

Head and shoulders settings

Every distance is a multiple of ATR(14), the average range of a bar, so the same settings work on any market and timeframe.

  1. Swing strength (bars). How many bars each side a high must stand above to count as a swing — 5 by default. Larger finds fewer, larger patterns.
  2. Shoulder tolerance (x ATR). How far apart in price the two shoulders may be — 1 ATR by default.
  3. Head above shoulders (x ATR). How far the head must stand above both shoulders — 0.5 ATR by default.
  4. Neckline slope limit (x ATR). How much the two troughs may differ in price — 1.5 ATR by default. Small accepts only a nearly level neckline.
  5. Min height (x ATR). How far the head must stand above the neckline — 2 ATR by default.
  6. Max pattern age (bars). How many bars the whole pattern may span, and how long it stays live waiting for the neckline to break, both counted from the left shoulder — 150 by default.
  7. Break distance (x ATR). How far past the neckline a bar must close to count as breaking it — 0 by default, so any close past it counts.
  8. After a failed break. If price breaks the neckline and closes back across it within the retest window, Watch again (the default) keeps the pattern, so a later break counts; End the pattern treats the first break as its last.

The two retest comparisons add a retest window (10 bars by default) and a retest distance (0.3 ATR), which say how soon and how near a return to the broken neckline has to be.

How to use head and shoulders in a strategy

These are the comparisons SixOne8 offers, in the builder's own words. Each has an inverse form.

  1. Head and shoulders forms. True only on the bar the right shoulder is confirmed and the shape passes every check.
  2. Price breaks below. Price closed below the neckline, having been on or above it the bar before. Judged on the close, so a wick through it does not count.
  3. Price sweeps the low. The bar traded below the neckline and closed back above it.
  4. Price retests the neckline from below. After a break, within the retest window, the bar's high came back to within the retest distance of the neckline and the bar closed below it.

Head and Shoulders on 4h  ·  price breaks below  ·  5-bar swings

Read it as a sentence: on the 4-hour chart, a head and shoulders built from five-bar swings has just had a close below its neckline. The builder's chart draws the shoulders and head labelled, the neckline, and an arrow on each bar that broke it.

What the head and shoulders rules leave out

The textbook reads a head and shoulders with falling volume into the right shoulder. The pattern here does not read volume on any market, so the shape is the whole definition. Many traders also project a measured move — the head's height above the neckline, measured down from the break. SixOne8 does not draw one; it is a charting convention, not a prediction, and a test of the break says more about your market than the convention does.

A pattern that had already traded above its head or closed below its neckline by the time it could be known is never read: it would be over before anyone could have acted on it. And a higher high in the same leg as the right shoulder, still under the head, is treated as the same shoulder seen better — it updates the pattern rather than forming a new one.

Does the head and shoulders work on your market?

Run an entry check. It will tell you whether, on the market you care about, the bars a neckline broke on moved any differently from a random bar over the history tested. Patterns are rarer than most conditions, so look at how many times it fired before reading anything into the result.

Next

Double top and bottom explained Two swings at the same price, a flat neckline under them, and its break. Market structure explained The swings every pattern is built from, and the breaks of structure between them.