Head and Shoulders Alert (GHAS)

What is a head and shoulders?

A head and shoulders is a topping pattern with three peaks. The middle peak, the head, is the highest. The two outside peaks, the shoulders, are lower and about even with each other.

A line under the two dips between the peaks is the neckline. The pattern is read as bearish once price falls through that line.

Parts of a head and shoulders

Left shoulder

The stock makes a high and pulls back. On its own it is just a rally that paused.

Head

Buyers push to a new, higher high, then the stock falls back to about where the last dip ended.

Right shoulder

The next rally stops short of the head, near the height of the left shoulder. Trade Ideas checks that the two shoulders are close in price, allowing for how volatile the stock is.

Neckline and break

The neckline connects the two dips. When price drops through it, the pattern is complete.

How traders use it

Step 1: Let the Trade Ideas alert find it

Turn on the Head and Shoulders alert (GHAS). The server needs exactly five turning points: high, low, higher high, low, high. You get the alert without drawing a neckline yourself. See it live in the Web Dashboard.

Step 2: Wait for the trigger

Keep in mind

Watch the neckline. The right shoulder alone does not finish the pattern, so most traders wait for a clean break.

Step 3: Entry

Some short on the break. Others wait for price to bounce back up to the neckline and fail there. Holders often use the break to sell.

Step 4: Exit

Trader tip

Stops usually go above the right shoulder. The usual first target is the distance from the head down to the neckline, measured from the break. That is the textbook way traders frame it, not advice.

Tips

• A sloping neckline is fine. Measure from where price actually breaks it.
• Volume often fades on the right shoulder. Watch for that.
• Patterns that form after a long run up mean more than ones in a choppy range.
• For the bullish version use the Inverted Head and Shoulders alert (GHASI).

Key point

Past results, including backtests, are not indicative of future results.

How the Head and Shoulders alert works

Key point

This alert reports the head and shoulders pattern, which is common in technical analysis.

A head and shoulders pattern is defined by exactly 5 consecutive turning points. The first point is a high. The last point is a high at approximately the same price as the first point. The second point is a low. The fourth point is a low at approximately the same price as the second point. The middle point is a high, and it must be higher than any of the other 5 points. Our definition of "approximately the same price" depends on the size of the pattern and the volatility of the stock.

Trader tip

There are many common interpretations of a head and shoulders pattern. Some people use the first and last points, the shoulders, to draw a resistance line. We use a red icon to represent this pattern, since many people use this as a reversal pattern.

Default settings

By default, the 'Head and Shoulders' alert will appear when these qualifications are met:

• The first point is a high
• The last point is a high at approximately the same price as the first point
• The second point is a low
• The fourth point is a low at approximately the same price as the second point
• The middle point is a high, and it must be higher than any of the other 5 points

Custom settings

Settings

For 'Head and Shoulders' alerts, you have the option to use an alert specific filter. This filter is located immediately to the right of the corresponding alert and is always optional. You can decide to leave it blank if you want to receive more alerts, or you can fill it in to restrict the number of alerts you receive. This filter allows you to specify the quality of the alert. When you set a higher number for this filter, you are telling the alerts server to display only alerts that meet a higher quality standard, resulting in fewer alerts being shown.

When setting an alert for 'Head and Shoulders', the user can filter the alert by hours traded.

Key point

If I see a pattern that lasted from noon yesterday to noon today, is that any better than a pattern that lasted from the open this morning to the close this afternoon? How much better? We weight the pre and post market according to volume. On an average day an average NASDAQ 100 stock will trade roughly 1 hour's worth of volume between the close and the following open. If you want to see stock patterns that lasted for a whole day, a good estimate is 7.5 hours, 6.5 for normal hours plus 1 for the pre and post market.

The same rules apply during the day. If a chart pattern lasts for one hour starting from the open, it will almost always be considered a stronger pattern than if it lasted one hour starting from the beginning of lunch. Hours are just an estimate. Volume is the major factor in this filter. Stocks trading on higher than average volume will satisfy this filter faster than stocks trading on lower than average volume.

What the alert shows you

Key point

The description of each alert lists the prices that formed the pattern. It also includes the times of when the pattern started and ended.

The quality value on a scan using the 'Head and Shoulders' alert defines the number of hours since the measured pattern has been established.

Related alerts

• Inverted Head and Shoulders alert (GHASI)
• Double Top alert (GDTOP)
• Triangle Top alert (GTTOP)
• Rectangle Top alert (GRTOP)
• Broadening Top alert (GBTOP)

Filters to pair with the Head and Shoulders alert

• Relative Volume filter
• Consolidation filter

Categories

• Geometric Pattern alerts and filters
• Volume Confirmed alerts and filters

FAQ