Head and shoulders in gold trading

Head and shoulders is a classic reversal pattern. In an uptrend, price makes a peak (left shoulder), a higher peak (head) and a lower peak (right shoulder). The line through the lows between the peaks is the neckline. A break below the neckline completes the pattern. The inverse head and shoulders is the bullish mirror at the end of a downtrend.

How it applies to gold trading

The pattern reflects a change in structure: the right shoulder is a lower high, showing buyers failing to make new highs. Traders often measure the distance from the head to the neckline and project it from the break as a minimum target. Many prefer to enter on a retest of the neckline from the other side, which gives a tighter stop.

On gold, false neckline breaks are common around news. A daily or 4-hour close beyond the neckline is more reliable than an intraday spike through it.

Worked example

Example (hypothetical numbers): left shoulder 4,060, head 4,100, right shoulder 4,065, neckline at 4,020. The head is $80 above the neckline, so the measured target after a break is 4,020 − 80 = 3,940. A trader sells the retest of 4,020 at 4,018 with a stop above the right shoulder at 4,068 ($50), or tighter at 4,035 for a smaller position.

A common mistake

Shorting before the neckline breaks. Until it does, the pattern is just a range.

See also: Double top and double bottom, Market structure, Retest, CHoCH.

Frequently asked questions