Written by and copyright © 2005-2013 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 115 to 131. 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 tops are the best performing bearish chart pattern in a bull market. Even in a
bear market, they are reliable performers, but a pullback occurs nearly two-thirds of the time.
Important Bull Market Results for Head-and-Shoulders Tops
Overall performance rank (1 is best): 1 out of 21
Break even failure rate: 4%
Average decline: 22%
Pullback rate: 50%
Percentage meeting price target: 55%
The above numbers are based on hundreds of perfect trades. See the glossary for definitions.
Head-and-Shoulders Top Identification Guidelines
|Price trend||Upward leading to the pattern|
|Shape||Looks like a head perched atop two shoulders. A 3-peak pattern with the middle peak above the others. The pattern should look like a person’s
head and shoulders, proportional, and not lopsided.|
|Symmetry||The two shoulders should peak near the same price, be nearly the same distance from the head, and look similar (both wide or both narrow peaks).|
|Volume||Highest on the left shoulder followed by the head. Trends downward 63% of the time.|
|Neckline||Joins the two armpits.|
|Confirmation||The pattern confirms as a valid one when price closes below an up-sloping neckline or below the right armpit when the neckline slopes downward.|
Head-and-Shoulders Top Trading Tips
|Measure rule||Compute the height from the head
(A in the Measure Rule figure to the right) to the
neckline directly below (B) then multiply it by the
above "percentage meeting price target."
Subtract the result from the breakout price (C). The
breakout price is where price
crosses an up-sloping neckline, or when the neckline slopes downward, use the right
|Price reversal||Price must have something to reverse, so if the rise leading to the pattern is small, expect a small decline.|
|Confirmation||Wait for confirmation before placing a trade.|
|Trends||A short-term rise leading to the pattern results in the best post breakout performance.|
|Velocity||A high velocity rise leading to the pattern often results in a larger decline post breakout.|
|Neckline||Patterns with up-sloping necklines perform better. The Measure Rule figure shows a green up-sloping neckline.|
|Shoulder||A higher left shoulder peak when compared to the right shoulder top results in a larger decline post breakout.
The Shoulder Peak figure to the right shows this.|
|Yearly high||Patterns within a third of the yearly high perform worst, but the differences are slight.|
|Volume trend||An upward volume trend suggests better post breakout performance.|
|Pullbacks||Pullbacks hurt post breakout performance.|
|Symmetry||Patterns with an extended right shoulder perform worse. Symmetrical looking patterns also perform worse.|
The Measure Rule
Head-and-Shoulders Top Example
The above figure shows an example of a Head-and-shoulders top chart pattern. The left shoulder
(LS) appears above the right shoulder (RS). But, the two shoulders appear symmetrical about the head. A neckline shown in blue, joins the two
armpits. Where price closes below the neckline, a breakout occurs and it also confirms the chart pattern as being
a valid head-and-shoulders top. A pullback occurs in this example just to make trading interesting.
-- Thomas Bulkowski
Other Head-and-Shoulders Top Examples
Copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved. Does fuzzy logic tickle?