Head and Shoulders

A head and shoulders is a reversal chart pattern that marks a potential top: price forms three peaks — a left shoulder, a higher central peak (the head), and a lower right shoulder — with the intervening lows connected by a line called the neckline. The pattern tells a story of a weakening uptrend: buyers push to a high, make one final higher high, and then fail to reach it again, showing demand is exhausted. The pattern completes only when price closes below the neckline; an inverted head and shoulders, with three troughs, signals a potential bottom the same way.

For example, suppose Bitcoin peaks at $68,000, pulls back to $64,000, rallies to $71,000, drops again to $64,500, and then can only reach $67,500 before falling. A break below the roughly $64,000 neckline completes the pattern, and the classical price target is the neckline minus the head-to-neckline height — here about $57,000.

A common misconception is that the pattern is valid as soon as the shapes are visible; until the neckline breaks, there is no pattern, only a possibility, and many budding head-and-shoulders formations resolve upward instead. Traders also watch volume, which ideally declines across the three peaks and expands on the neckline break.