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A head and shoulders pattern forms from three peaks — a higher middle peak (the "head") flanked by two lower peaks (the "shoulders") — and is traditionally read as a signal that an uptrend may be reversing into a downtrend.
A double top forms when price reaches a similar high twice with a pullback in between, suggesting resistance is holding firm. A double bottom is the mirror image at a support level, often read as a sign that selling pressure is running out.
These patterns describe crowd behavior — the same emotional cycle of buying, hesitation, and selling tends to repeat in a recognizable shape. They're most useful as one piece of a bigger picture, alongside support/resistance and momentum, rather than a signal to act on by itself.
Real-World Example
A stock rallies to a high, pulls back, rallies again to a slightly higher high (the head), pulls back again, then rallies a third time but only reaches a lower high (the second shoulder) before breaking down through the pattern's neckline, a classic head-and-shoulders top that experienced chart readers had been watching form over several weeks, giving them a heads-up on a potential trend reversal well before the actual breakdown confirmed it.
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