Head and shoulders

The parts have names: the first and third peaks are the shoulders, the taller middle peak is the head, and the line drawn through the two intervening lows is the neckline. The neckline does not have to be horizontal, and it is frequently drawn on a slope. The inverted arrangement, three troughs with the middle one lowest, is the inverse head and shoulders.

Convention treats the formation as incomplete until price closes through the neckline, not when the third peak forms, so the right shoulder alone identifies nothing. The conventional measurement is equally specific: the vertical distance from the head to the neckline is transferred from the point at which the neckline was broken, giving a projected level. Classic descriptions add a volume condition, with participation falling across the successive peaks, though volume for an over the counter instrument is a broker's own recorded activity rather than a whole market's.

The trap is that the neckline is a choice. Which lows are used to anchor it, and whether wicks or closes anchor it, changes where the break level sits and therefore whether a break has happened at all, so two chartists can look at one screen and disagree without either making an error. Practitioners disagree about the evidence too: tested work on rule-coded versions reports a weak but non-zero effect on some markets, and the standing objection is that coding the pattern requires arbitrary choices, so a test measures the coder's rules as much as the formation.