Definition
One of the most recognizable and reliable reversal patterns. It consists of three consecutive peaks: the middle one (“head”) is higher than the two side ones (“shoulders”).
How to Identify
- Forms after an uptrend.
- First peak — left shoulder.
- Second, higher peak — head.
- Third peak at the level of the first shoulder.
- Support line connects the lows between the peaks (the neckline).
Trading Rules
- Entry: Sell on a breakout below the neckline.
- Stop-loss: Above the right shoulder.
- Target: Project the distance from the head to the neckline downward.
Example
The pattern often appears on daily charts of currency pairs after prolonged rallies.
Conclusion
A reliable reversal pattern, especially effective when confirmed by volume.
