Head and Shoulders Pattern

The head and shoulders pattern is a technical analysis formation that signals a potential reversal from an uptrend to a downtrend. It consists of three peaks — a higher central peak (the head) flanked by two lower peaks (the shoulders) — with a neckline connecting the lows between the peaks. A confirmed break below the neckline typically signals the beginning of a bearish move.

A trader watching a daily chart of a currency pair might identify a head and shoulders pattern forming after a prolonged uptrend. Once the price breaks below the neckline with strong volume, they may enter a short position, targeting a move equal to the distance from the head to the neckline. In a prop trading context, this pattern is particularly useful for planning entries and exits with clear invalidation levels, helping traders define their risk precisely and avoid breaching drawdown thresholds.