The head and shoulder pattern is a reverse graphic pattern and is most often seen in uptrends. Heads and shoulders are known to traders because of the reversal signal.

## What is the pattern of the head and shoulders?

The head and shoulder pattern is also a trend backdrop. This pattern is formed by a peak (shoulder) and then a higher peak (head) and then another lower peak (shoulder). The “neckline” is drawn by connecting the lowest points of two troughs or depressions. The slope of this line can be increasing or decreasing. Normally, the output signal is more reliable when the slope is downward.

What is the head and shoulders pattern and how can it make the deal profitable?

In this example, the head and shoulder pattern can be easily seen. The head is the second peak and is the highest point in this pattern. The two shoulders also form a peak, but their height does not exceed. By viewing this arrangement, an entry order can be placed below the neckline. We can also calculate a target by measuring the point from the head to the neckline. This distance is almost enough for the price to move after breaking the neckline.

What is the head and shoulders pattern and how can it make the deal profitable?

You can see that when the price goes below the neckline, the movement it makes is at least equal to the distance from the head to the neckline. We know that you are now saying to yourself, “Of course, the price has continued to move even after reaching the target.” And our answer is: “ Do not be greedy! “.

## Inverted head and shoulder pattern

His name says it all. It’s basically a head and shoulders makeup, except this time it’s upside down. In this pattern, a valley (shoulder) is formed, followed by a lower valley (head), and then another higher valley (shoulder). This arrangement occurs after continuous descending movements.

What is the head and shoulders pattern and how can it make the deal profitable?

Here you can see that this pattern is exactly the same as the head and shoulder pattern, except that it is inverted. In this arrangement, we place an inbound purchase order above the neckline. The method of calculating the target is exactly the same as the head and shoulder pattern. Measure the distance from the head to the neckline, and this distance is approximately the same distance that the price moves after breaking the neckline.

What is the head and shoulders pattern and how can it make the deal profitable?

You can see that the price has gone up nicely after breaking the neckline. If your goal is achieved, be satisfied with your profit. However, there are capital management techniques that you can use to lock in some of your profits and keep your trade open if the price continues to move in your favor. We will discuss them later.

## Set loss limit or stop loss based on head and shoulder

Like what we said about the twin roof pattern and the twin floor pattern, there are two ways to determine the extent of the loss in the head and shoulder pattern.

1. Place the injury limit above the right shoulder after breaking the neckline
2. Place the loss limit above the surface of the pattern head

The problem with placing the loss limit above the pattern head is not having the right risk-to-return ratio. Given that your profit margin is head-to-shoulder, if you set the loss limit above your head, the risk to risk ratio will be less than 1: 1, which is not appropriate in terms of capital management.