Patterns tell a story in the market. The head and shoulders pattern and its counterpart, the inverted head and shoulders pattern, are some of the most well-known indicators for spotting trend reversals. If you’re trading futures, understanding these formations can give you a significant edge.
In this guide, we’ll break down:
How to identify and trade the head and shoulders pattern
When the inverse head and shoulders signals a bullish reversal
Key rules and common mistakes to watch out for
Let’s get into it.
What Is the Head and Shoulders Pattern?
The head and shoulders pattern is a bearish reversal signal that forms after an uptrend. It suggests that momentum is shifting from buyers to sellers, signaling an upcoming downtrend.
How It Forms:
1️⃣ Left Shoulder – Price rises, then pulls back.
2️⃣ Head – A higher peak forms but eventually declines.
3️⃣ Right Shoulder – Price rises again but fails to break the previous high.
4️⃣ Neckline Break – When the price drops below the neckline, it confirms the reversal.
Key Indicators:
📉 Decreasing volume as the right shoulder forms
📉 Break of the neckline signals an entry point
📉 Measured move target = distance from the head to the neckline projected downward
Example Trade Setup:
Entry: Sell once price breaks the neckline with increased volume
Stop-Loss: Above the right shoulder
Take-Profit Target: Project the head-to-neckline distance downward
This pattern is often seen in futures markets when buyers start losing strength and sellers take control.
What Does an Inverted Head and Shoulders Pattern Mean?
The inverse head and shoulders pattern is the bullish version of the setup. Instead of signaling a downtrend, it indicates a shift from bearish to bullish momentum.
How It Forms:
1️⃣ Left Shoulder – Price dips, then rebounds slightly.
2️⃣ Head – A lower low forms before buyers step in.
3️⃣ Right Shoulder – Another dip forms, but price fails to make a new low.
4️⃣ Neckline Break – When price breaks above the neckline, it confirms the reversal.
Example Trade Setup:
Entry: Buy when price breaks the neckline with strong volume
Stop-Loss: Below the right shoulder
Take-Profit Target: Distance from the head to the neckline projected upward
This pattern is commonly seen after extended sell-offs in futures markets, signaling a potential rally.
How Reliable Is an Inverse Head and Shoulders Pattern?
✅ High reliability in trending markets when confirmed by volume
✅ Works best in futures trading when paired with support/resistance levels
✅ Breakout retests offer additional entry opportunities
❌ False signals occur if the breakout lacks strong buying volume
❌ Risky trades if the broader market is still bearish
Can a Head and Shoulders Pattern Be Bullish?
❌ The traditional head and shoulders pattern is bearish. It suggests buyers are losing control, and a sell-off is coming.
✅ However, the inverse head and shoulders is a bullish formation, signaling buyers are stepping back in.
What Happens After a Head and Shoulders Pattern?
🚨 Bearish Breakdown (Standard Pattern):
If price breaks the neckline, expect a downtrend.
Often leads to a strong sell-off as traders exit long positions.
🚀 Bullish Breakout (Inverse Pattern):
If price breaks above the neckline, expect an uptrend.
Can lead to significant rallies, especially in futures markets.
What Is the Rule of Head and Shoulders Pattern?
📌 Golden Rule: Wait for the neckline to break before entering a trade!
📌 Other Key Rules:
✅ Volume should decrease as the right shoulder forms
✅ Price should break the neckline with strong momentum
✅ Stop-loss should be above the right shoulder (for bearish) or below the right shoulder (for bullish)
Is Head and Shoulders Pattern Good or Bad?
Good for traders who:
✔ Want to catch trend reversals early
✔ Use proper confirmation signals (volume, support, resistance)
✔ Follow risk management rules
Bad for traders who:
❌ Enter too early before confirmation
❌ Ignore market context and overall trend
❌ Fail to set stop-loss orders
What Are the Rules for Head and Shoulders Pattern?
✅ Head is the highest point (or lowest for inverse pattern)
✅ Shoulders should be relatively equal in size
✅ Breakout must happen with increased volume
✅ Stop-loss goes above/below the right shoulder
✅ Profit target = head-to-neckline distance projected beyond the breakout
Final Thoughts
The head and shoulders pattern and its inverted counterpart are two of the most reliable price action setups in futures trading. Whether you're looking for a bearish trend reversal or a bullish breakout, these patterns provide high-probability trade opportunities when used correctly.
🚀 Key Takeaways:
Wait for neckline confirmation before entering.
Use volume as a confirmation signal.
Combine with other indicators for stronger setups.
Ready to put this strategy into action? Start analyzing futures charts and see how this pattern plays out in real time!
