Head and Shoulders Pattern (and Inverse): Your Guide to Massive Profits

Today I’m going to show you step-by-step how to trade the head and shoulders pattern, including the inverse head and shoulders.

I even traded several of the examples you’re about to see.

And I should point something out:

This is not a guide for advanced traders only.

I’m a big believer in keeping things simple.

So whether you’re just starting or a seasoned pro, you’re going to love this guide.

Let’s get started.

What is a Head and Shoulders Pattern?

Before trading the pattern, you need to understand its key attributes.

This will help you quickly identify the most favorable head and shoulders setups.

Let’s begin with the illustration below.

As you can see from the drawing above, the head and shoulders pattern has five attributes.

In order of occurrence, they are:

1. Uptrend
2. Left shoulder
3. Head
4. Right shoulder
5. Neckline

Notice that I placed the “neckline” last. At first, that may seem like a mistake.

However, we need both shoulders and the head of the pattern before we can identify the neckline.

If that sounds confusing, don’t worry.

It will make more sense as you progress through the lesson.

Now let’s discuss each step in greater detail.

Step 1: Uptrend

The very first part of a head and shoulders pattern is the uptrend.

This is the extended move higher that eventually leads to exhaustion.

As a general rule, the longer the uptrend lasts, the more substantial the reversal is likely to be.

Step 2: Left shoulder

The market moves down to form a higher low.

At this point, things are starting to come together, but we don’t quite have enough to draw the neckline.

Step 3: Head

Now that the left shoulder has formed, the market makes a higher high which forms the head.

But despite the bullish rally, buyers are unable to make a substantially higher low.

At this point, we have the left shoulder and the head of the structure.

The neckline is also beginning to take shape, but we need the right shoulder before we can draw the neckline on our chart.

Step 4: Right shoulder

The right shoulder is where things come together.

It’s an indication that buyers are tiring and that the market may be gearing up for a reversal.

As soon as the right shoulder begins, we have enough to start plotting the neckline.

But because the pattern isn’t yet complete, it’s best to think of it as a rough draft rather than a final version.

Step 5: Neckline

Now that we have a defined head and two shoulders we can draw neckline support.

This level will become a key component when we get into how to trade the breakout.

Think of the neckline as the line in the sand between buyers and sellers.

Don’t Forget About the Inverse Head and Shoulders

Yes, the head and shoulders pattern has an inverse “cousin”.

The pattern is typically a bullish formation after an extended move down.

Remember that the standard head and shoulders is a bearish pattern after an extended move up.

It represents a possible exhaustion point in the market, where traders can begin to look for buying opportunities as the market establishes a bottom and starts to climb higher.

Note how it’s a mirror image of the standard pattern:

What Causes a Head and Shoulders to Form?

All price action tells a story.

Some are easier to interpret than others, but they’re always there.

When it comes to the head and shoulders pattern, the message is clear: buyers are losing steam, and a reversal could be on the horizon.

But what makes this pattern signal a reversal?

How can a few swing highs lead to such a significant market shift?

These questions help uncover key insights that can elevate your trading.

However, there’s a common misconception.

It’s not the price structure alone that causes the reversal.

The real story lies in the transition between buyers and sellers, with the pattern being a byproduct of that shift.

To clarify this, let’s examine a real head and shoulders setup on the GBPJPY weekly chart.

Notice that after forming the higher high (head) and pulling back, buyers couldn’t push the price above the head again.

This led to the formation of the right shoulder.

For GBPJPY bulls, that lower high would have been a major warning sign.

Now, let’s revisit the same GBPJPY chart.

As we discussed in the lesson on how to determine trend strength, the key sign of an upcoming trend change is a shift in the sequence of highs and lows.

For example, a market that has been forming higher highs and higher lows may signal trouble with just one lower high.

However, a trend isn’t technically broken until we see both a lower high and a lower low.

Notice how the price action in the second red circle above broke below the previous swing low.

Once that low was taken out, it was a clear sign that GBPJPY buyers were in trouble.

The head and shoulders reversal doesn’t work because of the pattern itself—it works because of how the highs and lows interact at the top of an uptrend.

Always remember to keep it simple.

We’re just identifying a potential trend shift by watching the relationship between highs and lows.

The same principles apply to the inverse head and shoulders—just reverse the concepts.

How to Confirm the Break

One key thing to remember about the head and shoulders pattern is that it’s only confirmed when the neckline support is broken.

And by break, I mean a close below it.

A common mistake among Forex traders is assuming the pattern is complete when the right shoulder forms.

In reality, it’s only complete and tradeable once the market closes below the neckline.

Notice in the illustration above that the market has closed below the neckline.

This confirms the head and shoulders pattern and signals a breakout.

As you may have guessed, the inverse pattern requires a sustained break above the neckline in a similar way.

Now let’s go back to our GBPJPY head and shoulders pattern example to see where it was confirmed.

Notice that it required a daily close below the neckline support to confirm the break.

Although a few prior sessions nearly broke the level, none of them actually closed below support.

Next, we’ll cover a few entry methods for trading the head and shoulders pattern.

How to Enter a Break of Neckline Support

So far in this lesson, we’ve covered the five key attributes of a head and shoulders pattern.

We’ve also gone over how to tell if a formation is still intact or has broken down.

Now for the fun part—how to trade and profit from a head and shoulders reversal.

There are two main ways to enter a breakout.

The first is to use a pending order to go short just below the neckline.

However, this approach doesn’t wait for the market to close below the neckline, which leaves you vulnerable to a false break.

It’s common to see a pair dip below support intraday, only to close back above the level by 5 pm EST.

That leads us to the second approach, which I prefer.

This method involves waiting for a daily close below the neckline before considering an entry.

By doing so, you reduce the risk of the market reversing and stopping you out.

Since I favor this method, we’ll focus on it moving forward.

Even with a daily close below the neckline, there are still two entry methods to consider.

Let’s break down each one in detail.

Entry Method #1

The first way to enter a head and shoulders break is to sell immediately after the candle closes below support.

For instance, since we’re analyzing GBPJPY on the daily time frame, we’d wait for a daily close below the neckline.

That would signal us to go short (sell).

Here’s how that would look:

Notice how we’re entering short as soon as the pair closes below neckline support.

Entry Method #2

While the method above can be useful, I usually prefer to wait for a retest of the neckline as new resistance.

This leads us to the second entry method.

Notice that with the second entry method, we wait for a retest of the neckline as new resistance.

This accomplishes two things:

1. It helps confirm the recent break
2. It provides a more favorable risk to reward ratio

This combination is why I almost always prefer the second method.

While there’s a greater chance of missing the entry by waiting, the potential reward often makes it worth it.

Where to Place Your Stop Loss + Risk Management

Despite its simplicity, stop loss placement when trading the head and shoulders pattern can be a controversial topic.

Some traders prefer to place the stop above the right shoulder, while others opt for a more aggressive approach.

As with everything in Forex, it’s about finding what works best for you.

That said, I believe a stop loss above the right shoulder is excessive.

It negatively impacts your risk-to-reward ratio.

Here’s why…

A head and shoulders is confirmed once the price closes below the neckline, right?

So, a close back above that level would invalidate the pattern.

Now, if my stop is above the right shoulder, am I going to wait for the market to take me out after a close above the neckline?

Of course not.

So really, there are three ways to exit the trade if things go wrong.

Let’s start with the first, less appealing option, and then I’ll cover my two preferred methods.

Stop Loss Placement #1

The first area you can place your stop loss is above the right shoulder.

Notice how this option provides plenty of space between your entry and stop loss.

However, this isn’t necessarily a good thing.

In fact, I’d argue it does more harm than good.

A stop loss that wide reduces your potential profit, sometimes by half or more.

In the case of the GBPJPY pattern, the measured objective, which we’ll cover next, is 1,800 pips below the breakout point.

If you used this first option for your stop, you’d have a 500-pip stop.

Dividing that into the objective gives us 3.6R.

That’s decent, but let’s see what could have been with the second option.

Stop Loss Placement #2

This is my preferred stop loss placement.

It allows for a much better risk-to-reward ratio while still allowing me to “hide” my stop loss.

Here’s how it looks on the GBPJPY chart:

Note that I’m placing the stop above the last swing high.

This gives about 200 pips of distance from my entry, so it’s still well-hidden, but not so far away that it negatively impacts my potential reward.

You can always go tighter depending on your trading style.

Just remember, the closer your stop is to your entry, the higher the chance of being stopped out prematurely.

Remember the 3.6R profit with the first stop loss placement?

By setting your stop above the last swing high, you’ve reduced your stop loss from 500 pips to 200 pips.

With an 1,800-pip objective, that’s a highly profitable 9R.

In hypothetical terms, that’s a 7.2% profit versus an 18% profit, assuming you risked 2% of your account balance on the trade.

Exit on Close (Mental Stop Loss)

There are two types of stop losses in trading.

The first is the “hard” stop, which is placed with your broker at a set price.

The second is a “mental” stop, which exists only in your mind and is typically triggered by a close above or below a key level.

For a head and shoulders reversal, any daily close back above the neckline signals invalidation.

And personally, I’d rather take a 50-pip loss than a 100-pip loss.

Using the GBPJPY example, if the market had closed back above the neckline after breaking below, we would exit the trade.

That close would indicate the pattern is no longer valid and that sellers are losing control.

This approach can be applied to nearly any pattern, helping you minimize losses when the market turns against you.

Where to Take Profit

Knowing when to take profit can be the difference between a winning and losing trade.

It’s arguably one of the most challenging aspects of trading.

For the head and shoulders pattern, there are two main approaches to consider.

In fact, a blend of the two might work best for some traders.

Approach #1

The first and more conservative approach is to book profit at the first key support level.

These are the areas you’ve identified where the market could bounce.

It’s often a good idea to take profit when the market retests one of these levels.

Since every situation is unique, these support levels will vary.

However, one thing must always hold true—a favorable risk-to-reward ratio.

So, always do the math before taking the trade.

Approach #2

The second, more aggressive approach is to use a measured objective.

Although using a measured objective is more aggressive as your target is further away from your entry, it’s also more universal.

Why?

Because with this method, you measure the height of the entire pattern, providing a specific target area no matter the situation.

Here’s an example from the EURCAD daily chart:

Note that I measure from the top of the head straight down to the neckline.

I then take that same distance and measure down from the breakout point.

This small but important detail is especially crucial when dealing with angled necklines.

One last note about measured objectives: while they can be highly accurate, they’re rarely perfect.

It’s best to think of them as general areas rather than exact levels.

To add confidence, try to find a key support level that intersects with or comes close to the measured objective.

This helps validate the target area and gives you more confidence in the trade.

Head and Shoulder Examples

You can never have too many examples.

So, to start wrapping things up, here are a couple more examples of the head and shoulders in action.

Notice how each structure forms in its own unique way but still effectively signals a reversal.

First up is the EURCAD daily chart.

Notice how, in this case, the measured objective aligned with a key pivot area.

While not necessary, this can add extra confidence to any trade idea stemming from the reversal.

The second reversal pattern appeared on the USDJPY weekly time frame after a multi-year uptrend.

A key difference from the first EURCAD reversal is that the USDJPY neckline is a horizontal level.

This is perfectly acceptable, though less common.

In most cases, the neckline forms at a diagonal.

The slope can vary, but one thing must always hold true—the level should move from lower left to upper right.

Refer to the angle on the first EURCAD chart above for comparison.

A Checklist for Trading Head and Shoulders Patterns

By now, you’re familiar with the pattern’s attributes, where to find it, and most importantly, how to enter and exit for profit.

But before you go, I want to share a few key insights.

Think of these as essential rules to follow when trading the head and shoulders pattern.

Let’s dive in.

The pattern must form after an extended move higher

This rule is straightforward.

A head and shoulders can only be a bearish reversal pattern if it forms after an extended move higher.

One way to double-check is to ensure there are no immediate swing highs to the left of the formation.

Look at the charts above.

Notice all the white space to the left—that’s exactly what you want to see when trading any bearish reversal pattern.

Neither shoulder can be above the head

You can’t raise your shoulders above your head, right?

The same goes for this technical pattern—the head should always rise above both the left and right shoulders.

While there’s no exact measurement for the distance, it should be clear at a quick glance.

The neckline can be horizontal, ascending, or descending

The neckline of this reversal pattern can form at any angle.

However, be cautious of patterns with a descending neckline, despite claims that it indicates a weaker market (which might seem favorable for shorting).

For instance, if you see this:

It could easily backfire and turn into a falling wedge, a bullish pattern.

And while you may still enjoy a favorable outcome, the odds aren’t in your favor.

Instead, this is what you want to see:

Note how the neckline slopes from the lower left to the upper right.

This indicates a “healthy” head and shoulders pattern, one worth watching.

In my experience, the steeper the neckline’s angle, the more aggressive the breakout and reversal tend to be.

Just take a look at the GBPJPY example above.

Now, the shoulders should ideally be on the same horizontal plane.

This concept can be tricky to explain, so let’s use an illustration to clarify.

Notice how both the left and right shoulders “overlap” to some extent, sharing part of the same horizontal plane.

They don’t need to overlap completely, but they should share some of the highlighted area above.

If you come across a price structure that doesn’t fit this description, it’s not technically a head and shoulders pattern.

Stick to the daily and weekly time frames

Last, but certainly not least, are the time frames that tend to perform the best.

After years of trading these reversals, I can confidently say they are most reliable on the daily and weekly time frames.

While it’s possible to trade them on a 1-hour or 4-hour chart, you run the risk of encountering many false positives—patterns that resemble a head and shoulders but don’t behave like one.

To avoid this be sure to stick to the daily time frame and higher.

That’s where you’ll typically find the most consistent trends.

BONUS: The Failed Head and Shoulders Setup

No chart pattern is guaranteed to work.

So, what should you do if a head and shoulders pattern fails?

Many traders would simply take the loss and move on, but by doing so, they’re missing out on potential profits.

A failed head and shoulders occurs when the market closes back above the neckline (or below for an inverse pattern).

This is actually one of the highest probability setups in Forex!

Instead of ignoring these failed patterns, you can trade in the opposite direction.

For instance, if the market closes back above the neckline, it’s likely a good time to turn bullish and start looking for buy signals.

From my experience, failed patterns can be huge money-makers, so don’t overlook them.

Final Thoughts

There are many ways to trade reversals in the Forex market, but few are as consistently profitable as the head and shoulders pattern.

It’s not just about trading a technical formation—it’s about “reading” the price action to understand the fundamental shift between buyers and sellers.

While there are no guarantees in Forex, the head and shoulders strategy you’ve just learned is as close as it gets.

Follow these guidelines, and you’ll be well on your way to achieving consistent profits.

Frequently Asked Questions

Wait, Before You Go…

Are you ready to start trading the head and shoulders reversal pattern?

If so, you definitely want to download the free head and shoulders pattern PDF that I just created.

It contains everything you need to know to maximize profits and minimize losses while trading them.

That includes how to enter, where to place your stop loss, measured objectives and much more.

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