Definition – What does Head and Shoulders mean?
Head and shoulders is a technical analysis pattern where rallies in a currency pair’s price action form a shape similar to a left shoulder, a head and a right shoulder. The first rally forms the left shoulder, the second rally pushed the price higher than the left shoulder, forming the head, and the third rally has less force than the second, forming a lower right shoulder. The head and shoulders pattern is a common reversal pattern, meaning that the upward trend forming the left shoulder will be reversed after the left shoulder has formed.
ForexTerms explains Head and Shoulders
The important part of a head and shoulders is the neckline that is formed by connecting the bottoms of the shoulders. When the price action breaches this neckline, the movement is expected to go the same distance down from the neckline as the top of the head is above the neckline. The head and shoulders pattern is bearish, but there is also an inverse head and shoulders that serves as a bullish pattern.