What it is
Head and shoulders is the best-known reversal formation: three consecutive peaks in which the middle peak, the head, is the highest, and the two outer peaks, the shoulders, are lower and roughly symmetrical. A line drawn through the two intervening reaction lows is the neckline. Inverted, the same structure marks a potential bottom.
How it works
Identification requires a preceding uptrend, since a reversal pattern needs something to reverse; the same shape inside a range is just noise. Classic descriptions expect volume to be heaviest on the left shoulder and on the advance into the head, then noticeably lighter on the right shoulder, signalling waning demand. The pattern is not complete until price closes beyond the neckline. Everything before that point is a hypothesis, not a formation.
How traders use it
The conventional trade enters on the neckline break or on the retest that frequently follows it, places the stop above the right shoulder, and takes the measured objective: the vertical distance from the head to the neckline, projected from the break point. Because both the stop and the target come from the pattern's own geometry, the risk-reward of the trade is knowable before entry, which is the main reason the formation has survived a century of use.
Where it breaks down
The subjectivity is real. Necklines can be sloped, shoulders are rarely symmetrical, and the pattern tends to be obvious only once it has already worked. Attempts to encode the rules mechanically find modest and inconsistent edges, and false neckline breaks that immediately reclaim the level are common. Treat it as a way to organise a chart into a level and an invalidation point rather than as a probability claim.
Educational reference. This entry describes how a concept is defined and used. It is not investment advice, not a recommendation, and not a signal. Any rule you build from it should be tested with realistic costs before it is traded, and no historical result guarantees a future one.