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Written by and copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved.
For more information on this pattern, read
Encyclopedia of Chart Patterns, Second Edition  ,
pictured on the right, pages 374 to 389. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.
Head-and-shoulders bottoms are reliable chart patterns that sport a low failure rate and good
average rise. Performance improves if the pattern appears within a third of the yearly high as opposed to near the
yearly low.
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Head-and-Shoulders Bottom
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Important Bull Market Results
Overall performance rank (1 is best): 7 out of 23
Break even failure rate: 3%
Average rise: 38%
Throwback rate: 45%
Percentage meeting price target: 74%
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Identification Guidelines
| Characteristic | Discussion |
| Price trend | Downward leading to the pattern |
| Shape | A 3-valley pattern with the middle valley below the others. The pattern should look like an inverted person’s head and shoulders, proportional,
and not lopsided. |
| Symmetry | The two shoulders should bottom near the same price, be nearly the same distance from the head, and look similar (both wide or both narrow). |
| Volume | Highest on the left shoulder or head, diminished on the right shoulder. Trends downward 66% of the time. |
| Neckline | Joins the two armpits. |
| Confirmation | The pattern confirms as a valid one when price closes above a down-sloping neckline or above the right armpit when the neckline slopes upward. |
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Trading Tips
| Trading Tactic | Explanation |
| Measure rule | Compute the height from the head low
(A) to the neckline directly above
(B) and then multiply it by the "percentage meeting price target" (see above). Add it to the breakout price
(C). The breakout price is where price crosses a
down-sloping neckline, or when the neckline slopes upward, use the peak of the
right shoulder armpit. See the Measure Rule figure to the right. |
| Price reversal | Price must have something to reverse, so if the decline leading to the pattern is small, expect a small rise. |
| Confirmation | Wait for confirmation before placing a trade. In the
Measure Rule figure to the right, confirmation occurs at
C. |
| Trends | A short-term drop leading to the pattern results in the best postbreakout performance. |
| Neckline | Patterns with down-sloping necklines perform better. The
Measure Rule figure to the right shows an example of a head-and-shoulders bottom
with a down-sloping neckline. |
| Shoulder | A higher left shoulder valley when compared to the right
shoulder valley results in a larger rise postbreakout, but the difference is small.
The Shoulder Valley figure to the right shows this. |
| Yearly high | Patterns having breakouts within a third of the yearly high perform best. |
| Volume trend | A downward volume trend suggests better postbreakout performance. |
| Throwbacks | Throwbacks hurt postbreakout performance. |
| Symmetry | Patterns with an extended right shoulder perform worse. Symmetrical looking patterns also perform better. |
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 The Measure Rule
Shoulder Valley
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Example
The above figure shows an example of a Head-and-shoulders bottom chart pattern. The left shoulder
(LS), head, and right shoulder
(RS) form three consecutive valleys. Shoulder distance from the head is similar as is
the price at which the two shoulders bottom. A blue neckline joins armpits A and
(B). When price closes above the neckline at C, it confirms
the head-and-shoulders bottom chart pattern as a valid one.
Other Examples
-- Thomas Bulkowski
Copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved. Backups? We don’t need no steenking backups.
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