Crypto glossary
Head and shoulders pattern
Head and shoulders is a reversal chart pattern with three peaks, the middle one highest, that signals a possible end to an uptrend when its neckline breaks.
The pattern forms when price makes a peak (left shoulder), a higher peak (head) and a lower peak (right shoulder), with pullbacks between them. A line through the two troughs is the neckline. The pattern is confirmed when price closes below the neckline, and the usual target is the distance from the head to the neckline projected downward from the break.
The inverse head and shoulders is the mirror image at the bottom of a downtrend, with three troughs and a neckline above them, and is read as a bullish reversal. Both versions are among the most cited patterns in crypto commentary, appearing on bitcoin's weekly chart as well as on small altcoins.
Many apparent head and shoulders never confirm, and right shoulders are often redrawn as the market moves. Traders typically wait for the neckline break and sometimes a retest of it from the other side, and they place stops above the right shoulder in case the break fails.
Example
ETH forms peaks at 3,600, 4,000 and 3,650 dollars with a neckline near 3,200. When a daily candle closes at 3,120, traders project the 800-dollar head height down to a target around 2,400.