Head and shoulders, also known as head and shoulders top, is a trend reversal pattern that appears after a downtrend or an uptrend. There are standard and inverse head and shoulders patterns.

The standard pattern indicates a price drop after an uptrend, while the inverse pattern shows a price increase after a downtrend. Below you will learn all about the standard pattern and study two methods for finding selling conditions.

How to Spot a Standard Head and Shoulders Pattern

The standard head and shoulders pattern can be identified by the left shoulder, right shoulder, head, and neckline. This pattern appears after an uptrend and signals a potential reversal to a downtrend.

Trading with Standard Head and Shoulders: Method One

After you find a pattern during an uptrend, the right shoulder will have formed, and you can start looking for an entry point for a sell order once the price breaches the neckline. You need to wait for the formation of a candle below the neckline to avoid entering the market on a false breakout.

The stop-loss can be placed above the right shoulder.

The profit level can be calculated if you measure the distance between the head and the neckline of the pattern. Then you place the profit level at the same distance in the direction of the breakout from the neckline.

Trading with Standard Head and Shoulders: Method Two

The second method involves waiting for the price to breach the support (the neckline downwards) similar to the first method. After this, you place a sell order at the time when the price rechecks the neckline (the breached support becomes resistance).

The stop-loss is placed above the new resistance area.

The breakout level will be the same as in the first method. There you determined the distance between the neckline and the head and placed the profit level below the neckline at the same distance.