Reversal patterns: head and shoulders, double top and double bottom

No trend lasts forever. At some point buyers run out of steam, sellers take control, and the chart often draws a recognisable shape before price turns. These shapes are called reversal patterns. The two most widely used families are the head and shoulders and the double top, along with their inverted versions at market bottoms.

Before we get into the detail, keep one idea in mind for the whole lesson: a pattern predicts nothing. It tells you an imbalance between buyers and sellers is possible. It gives you a framework to decide where to enter, where to exit and where you are wrong. It is a probability, not a certainty.

Head and shoulders: three peaks that show a trend running out of steam

A head and shoulders forms after an uptrend. Price makes a first peak (the left shoulder), pulls back, then rallies higher to form the head. It pulls back again, then attempts a third rally that fails below the head: that is the right shoulder. The two lows between these peaks are joined by a line called the neckline.

The story behind the pattern is simple. On the head, buyers still manage a new high. On the right shoulder, they can't. The sequence of higher highs is broken. As long as the neckline holds, though, the uptrend isn't over. It is only weakened.

• A prior trend: with no rally beforehand, there is nothing to reverse. A head and shoulders in the middle of a range is worth very little.
• Rough symmetry: the shoulders don't need to match, but a right shoulder that is clearly lower shows weaker buyers.
• The neckline: it can be flat or slightly sloped. A downward-sloping neckline is often more bearish.
• Volume (on stocks and indices): it tends to fade on the right shoulder, a sign that buying interest is drying up.

Inverse head and shoulders: the same logic at the bottom

After a decline, the pattern can appear upside down. A first low, a deeper low (the head), then a third, shallower low. Sellers can no longer push to new lows. This time the neckline joins the two intermediate highs, and it is a break to the upside that confirms the pattern.

Double top and double bottom

The double top is even simpler. Price fails twice at the same resistance zone, with a dip in between. That intermediate low acts as the neckline. While price stays above it, all you have is resistance holding. Once price closes below it, the pattern is confirmed.

The double bottom is its mirror image: two bounces off the same support, a peak in between, and confirmation when price closes above that peak. The two lows don't have to match to the pip. On gold, a gap of a few dollars between the two lows still makes a valid double bottom.

Confirm, target, protect

All these patterns are traded with the same three-step method. First, confirmation: a candle that closes beyond the neckline on the timeframe you trade. A wick alone isn't enough. Next, the target: measure the height of the pattern and project it from the breakout point. Finally, the stop: beyond the right shoulder (or the second peak), where the pattern would clearly be invalid.

There is a second way in: wait for the retest. After the break, price often comes back up to touch the neckline from below, where it now acts as resistance. Entering on that pullback gives you a tighter stop, but you miss the moves that leave without looking back. There's no universal right answer, only a rule you pick and apply every single time.

The most common traps

• Jumping the gun: selling the right shoulder before the break means betting on a pattern that doesn't exist yet.
• Seeing patterns everywhere: if you go looking for a head and shoulders, you'll find one. Demand a clear prior trend and a pattern you can read without squinting.
• Ignoring context: a bearish head and shoulders under weekly resistance carries more weight than an isolated pattern on the 5-minute chart.
• Forgetting the news: a release like US non-farm payrolls can wipe out any pattern in seconds. Check the economic calendar before you enter.
• Moving your stop: if price climbs back above the right shoulder, the pattern is invalid. Take the loss you planned.

To improve, log every pattern you spot in a journal, even the ones you don't trade. After a few dozen examples, you'll know which market and timeframe these patterns work best on for you. That's exactly what you'll do in the last lesson of this level, which is all about backtesting.