A subject within technical analysis that many traders find difficult to apply to their day-to-day trading is the ability to spot reversals in price.
The misreading of price activity when a reversal is materialising can often lead to incorrect decisions, such as entering a trade too early, which can result in being stopped out of a potentially successful trade before price activity moves in the intended direction.
In this piece today, and part 2 tomorrow, we want to look at 2 types of reversal in price – the Head and Shoulders/Reversed Head and Shoulders and the Double Top/Double Bottom.
The intention is to help you understand why price activity is reversing and highlight how knowledge of this may be applied within your own individual trading strategies.
The Head and Shoulders Pattern
This pattern highlights the potential,
• reversal of a previous downtrend in price into a more prolonged period of upside strength
• reversal of a previous uptrend in price into a phase of weakness
In this example, we are going to outline in more detail a bullish reversal in price, which is called a ‘Reversed Head and Shoulders’.
Points to Note: Reversed Head and Shoulders
• A downtrend in price must have been in place.
• A Reversed Head and Shoulders is made up of 3 clear troughs on a price chart.
• The middle trough (called the Head) is lower than the 2 outer price troughs (called the
Left Hand Shoulder and the Right Hand Shoulder).
• The 3rd low in price (Right Hand Shoulder) being higher than the Head, reflects the
inability of sellers to be able to break under a previous low in price. This is regarded as a
‘weak test’ of a previous price extreme, suggesting buyers may be gaining the upper hand,
readying for a potential positive sentiment shift and price strength.
• A trendline connecting highs in price that mark the upper extremes of the Head is drawn.
This highlights the Neckline of the pattern, which if broken on a closing basis, completes
the reversal, to represent a positive shift in sentiment and the potential of further price strength.
Point to Note: To understand a bearish reversal, known as a ‘Head and Shoulders Top’ please simply follow the opposite analysis of what is highlighted above.
GBPUSD Example:
In the chart below, we look at the recent activity of GBPUSD, which formed a bullish Reversed Head and Shoulders Pattern between December 20th 2024 and February 13th 2025, when the pattern was completed.
As with any bullish reversal in price, a clear downtrend and extended price decline must have been seen previously, for the reversal pattern to be valid. On the chart above, this was reflected by the decline from the September 20th 2024 high at 1.3434, into the January 13th price low at 1.2100.
The Head and Shoulders pattern is made up of 3 troughs in price and in this example, these are marked by the period between December 30th 2024 to January 7th 2025 which forms the Left Hand Shoulder, between January 7th to February 5th 2025 which was the Head developing, and between February 5th to February 13th 2025, which then formed the Right Hand Shoulder.
The Neckline of the pattern is drawn connecting the December 30th 2024 high and the February 5th 2025 highs, which was broken on a closing basis on February 13th 2025. It was on this day, the Reversed Head and Shoulders Pattern was completed with potential then turning towards a more extended phase of price strength.
Does the Head and Shoulders offer an Insight into a Potential Price Objective?
Yes, it does, by measuring the height from the bottom of the Head to the level of the Neckline at the time that low was posted, we can project this distance higher from the point the neckline was broken. This suggests a possible minimum objective for any future price strength.
In the example above, a low of 1.2100 was registered on January 13th 2025, at which time the Neckline stood at 1.2576. This means the height of the Head was 0.0476 (476 pips). On February 13th when the Neckline was broken on a closing basis, the Neckline stood at 1.2529.
As such…
1.2529 + 0.0476 = 1.3005, which would be the minimum potential price objective for the Reversed Head and Shoulders. This level was in fact achieved on March 18th 2025.
Of course, while the Head and Shoulders pattern is regarded as one of the most reliable patterns within technical analysis, it is not a guarantee of a significant price movement, as much will still depend on future sentiment and price trends.
Therefore, if initiating a trade based on a Reversed Head and Shoulders pattern, you must ALWAYS place a stop loss to protect against any unforeseen event or price movement.
The stop loss should initially be placed just under the level of the Right Hand Shoulder, as any break of this point negates the pattern, meaning we were wrong to class the pattern as we did.
However, if prices rise after completion of the pattern, you can consider moving a stop loss higher, keeping it just under higher support levels to protect your position.
We highlighted the formation of the potential GBPUSD reversed Head and Shoulders pattern on February 13th 2025, so please take a look at our timeline for further details.
Remember to watch out for tomorrow’s Part 2 post
The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research, we will not seek to take any advantage before providing it to our clients.
Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.
The misreading of price activity when a reversal is materialising can often lead to incorrect decisions, such as entering a trade too early, which can result in being stopped out of a potentially successful trade before price activity moves in the intended direction.
In this piece today, and part 2 tomorrow, we want to look at 2 types of reversal in price – the Head and Shoulders/Reversed Head and Shoulders and the Double Top/Double Bottom.
The intention is to help you understand why price activity is reversing and highlight how knowledge of this may be applied within your own individual trading strategies.
The Head and Shoulders Pattern
This pattern highlights the potential,
• reversal of a previous downtrend in price into a more prolonged period of upside strength
• reversal of a previous uptrend in price into a phase of weakness
In this example, we are going to outline in more detail a bullish reversal in price, which is called a ‘Reversed Head and Shoulders’.
Points to Note: Reversed Head and Shoulders
• A downtrend in price must have been in place.
• A Reversed Head and Shoulders is made up of 3 clear troughs on a price chart.
• The middle trough (called the Head) is lower than the 2 outer price troughs (called the
Left Hand Shoulder and the Right Hand Shoulder).
• The 3rd low in price (Right Hand Shoulder) being higher than the Head, reflects the
inability of sellers to be able to break under a previous low in price. This is regarded as a
‘weak test’ of a previous price extreme, suggesting buyers may be gaining the upper hand,
readying for a potential positive sentiment shift and price strength.
• A trendline connecting highs in price that mark the upper extremes of the Head is drawn.
This highlights the Neckline of the pattern, which if broken on a closing basis, completes
the reversal, to represent a positive shift in sentiment and the potential of further price strength.
Point to Note: To understand a bearish reversal, known as a ‘Head and Shoulders Top’ please simply follow the opposite analysis of what is highlighted above.
GBPUSD Example:
In the chart below, we look at the recent activity of GBPUSD, which formed a bullish Reversed Head and Shoulders Pattern between December 20th 2024 and February 13th 2025, when the pattern was completed.
As with any bullish reversal in price, a clear downtrend and extended price decline must have been seen previously, for the reversal pattern to be valid. On the chart above, this was reflected by the decline from the September 20th 2024 high at 1.3434, into the January 13th price low at 1.2100.
The Head and Shoulders pattern is made up of 3 troughs in price and in this example, these are marked by the period between December 30th 2024 to January 7th 2025 which forms the Left Hand Shoulder, between January 7th to February 5th 2025 which was the Head developing, and between February 5th to February 13th 2025, which then formed the Right Hand Shoulder.
The Neckline of the pattern is drawn connecting the December 30th 2024 high and the February 5th 2025 highs, which was broken on a closing basis on February 13th 2025. It was on this day, the Reversed Head and Shoulders Pattern was completed with potential then turning towards a more extended phase of price strength.
Does the Head and Shoulders offer an Insight into a Potential Price Objective?
Yes, it does, by measuring the height from the bottom of the Head to the level of the Neckline at the time that low was posted, we can project this distance higher from the point the neckline was broken. This suggests a possible minimum objective for any future price strength.
In the example above, a low of 1.2100 was registered on January 13th 2025, at which time the Neckline stood at 1.2576. This means the height of the Head was 0.0476 (476 pips). On February 13th when the Neckline was broken on a closing basis, the Neckline stood at 1.2529.
As such…
1.2529 + 0.0476 = 1.3005, which would be the minimum potential price objective for the Reversed Head and Shoulders. This level was in fact achieved on March 18th 2025.
Of course, while the Head and Shoulders pattern is regarded as one of the most reliable patterns within technical analysis, it is not a guarantee of a significant price movement, as much will still depend on future sentiment and price trends.
Therefore, if initiating a trade based on a Reversed Head and Shoulders pattern, you must ALWAYS place a stop loss to protect against any unforeseen event or price movement.
The stop loss should initially be placed just under the level of the Right Hand Shoulder, as any break of this point negates the pattern, meaning we were wrong to class the pattern as we did.
However, if prices rise after completion of the pattern, you can consider moving a stop loss higher, keeping it just under higher support levels to protect your position.
We highlighted the formation of the potential GBPUSD reversed Head and Shoulders pattern on February 13th 2025, so please take a look at our timeline for further details.
Remember to watch out for tomorrow’s Part 2 post
The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research, we will not seek to take any advantage before providing it to our clients.
Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.
Global risk Warning CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading in CFDs. You should consider whether you understand how CFD
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Global risk Warning CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading in CFDs. You should consider whether you understand how CFD
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.