Recently, many people have been discussing technical analysis, especially the Head and Shoulders Top and Head and Shoulders Bottom patterns. To be honest, these charts look simple, but few truly understand them thoroughly. Today, from the perspective of a market observer, let's talk about what these patterns are really playing at.

Starting with the Head and Shoulders Top. Simply put, after the stock price reaches a high point, three relatively high points appear: the left shoulder, the head, and the right shoulder. What is the core logic of this pattern? It’s that the buying momentum gradually weakens, and finally the sellers start to take over. When the left shoulder forms, some people take profits, but others remain optimistic about the future; by the time the head forms, trading volume begins to shrink, which is actually a signal — everyone wants to sell at the high, but no one is willing to buy; when the right shoulder forms, the low point is not lower than the previous wave, indicating that the rebound strength is insufficient, and the high point has not broken through the previous high. Once the price breaks below the neckline, it’s time to escape.

I remember Tencent’s rally. It started rebounding at the end of 2022, formed the head in January 2023, and the right shoulder appeared in March. When it broke the neckline around late April at about 360 yuan, if you sold then, although it was still some distance from the high of 415, nearly a year later it never exceeded 360 again. Looking back now, that break below the neckline was the golden escape wave — missing it meant you could only exit at a lower price.

For those wanting to short for profit, the Head and Shoulders Top is also a good entry point. But here’s a key: you must set three points. The entry point is where the neckline is broken; the exit point should be closely watched at the neckline — once the price rebounds and breaks through, you should close your position immediately, don’t be greedy. The method to set the target is to measure the distance from the entry point to the head, then subtract the same amount downward from the entry point. If you entered at 360 and exited at 305, you could reach the target in just one month.

Conversely, the Head and Shoulders Bottom pattern is a bullish signal. It can be understood as an inverted Head and Shoulders Top. The logic of the bottom pattern is that selling pressure gradually weakens, and new buyers flood in. The left shoulder is the last rebound before the bottom, where some are trying to catch the bottom, but the momentum is weak; the head is the lowest point of the entire decline, with very low trading volume because sellers have sold out; when the right shoulder forms, the low point is higher than the previous wave, indicating buy orders are coming in to support the price, and upward momentum is strengthening.

Using the Head and Shoulders Bottom pattern to go long has two buy points. The first is to buy immediately after the right shoulder is confirmed — this carries higher risk but the price is cheaper; the second is to buy after the price breaks through the neckline — this has lower risk but you might miss the lowest price. Which one to choose depends on personal style. When setting stop-losses, if entering from the neckline, use the right shoulder’s price as the stop-loss; if entering from the right shoulder, use the head’s price as the stop-loss. For profit targets, short-term traders can set a stop-loss at 2 to 3 times the distance of the expected gain.

But here’s an important point: all technical analysis tools are just aids to improve win rates, not a holy grail. When fundamentals change significantly, the pattern will fail. Tencent’s case is typical — in late 2023, the right shoulder formed, and a rebound was expected, but at the end of December, the government suddenly introduced policies, causing the stock to plunge 12.3% in a single day, destroying the pattern. Also, assets with very low trading volume are not suitable for pattern analysis because the sample size is too small, making the statistical results unreliable. Larger stocks and indices are more suitable than individual stocks.

So, the final advice is that the Head and Shoulders Bottom pattern is indeed a useful reference, but don’t blindly trust it. Combine it with fundamentals, market sentiment, and trading volume to truly improve your trading success rate. Remember, patterns are just statistical results — the market always has exceptions.