Recently, I saw someone asking about technical patterns again, so I decided to organize my understanding. When it comes to judging stock price movements, the head and shoulders top and bottom patterns are indeed two I frequently use.

Let's start with the head and shoulders top. When this pattern appears, it usually indicates that the stock price may be about to adjust. Simply put, the price forms three relatively high points—left shoulder, head, and right shoulder—with the head being the highest, and the shoulders being lower on both sides. When the right shoulder fails to break through the previous high, that’s a warning sign.

The most memorable case for me was Tencent’s rally. It started rebounding at the end of 2022, forming the head in early 2023, and then the right shoulder appeared in spring. At that time, I warned those around me to pay attention because once the price broke the neckline (the support line connecting the lows of the left and right shoulders), it was basically time to consider exiting. Tencent broke the neckline at around 360 yuan, although it was still below the high of 415, but over the following year, the stock never returned to that level, with the lowest dropping into the 200s.

Regarding exit signals, there are two key points to remember. The first is that when the right shoulder forms and does not surpass the previous high, a break below the neckline should trigger a sell. The second is if you miss the first move, observe whether the rebound can return above the neckline; if it can’t, then reassess.

What about shorting? The head and shoulders top pattern is indeed a good entry point for shorting. But shorting isn’t just about selling; it requires constant market monitoring. The key is to set proper entry, exit, and profit-taking points. The entry point is the sell point; the exit point should focus on the neckline—once the price rebounds and breaks above the neckline, you should exit immediately, regardless of profit. As for profit targets, it’s generally recommended to set them at a distance equal to the height from the entry point to the head. Taking Tencent as an example, entering at 360 and exiting at 305, the target was reached in just one month.

Conversely, the head and shoulders bottom pattern is a bullish signal. The pattern looks like an inverted head and shoulders, indicating weakening selling pressure and increasing buying interest. During the formation of the head and shoulders bottom, the left shoulder is the last rebound before the bottom, and many bottom-fishers tend to enter at this stage. The head is the lowest point of the entire decline, often with low trading volume because most people have already exited. When the right shoulder forms, the low point is higher than the previous wave, indicating buy orders are supporting the price and upward momentum is strengthening.

There are usually two buy signals. One is to buy directly after the right shoulder is confirmed, because the gradually rising lows suggest the highs will also rise. The other is to buy once the price breaks above the neckline; at this point, the upward trend is more certain and the risk is relatively lower. The first signal carries higher risk but offers greater potential reward, while the second is more conservative but might miss the lowest price.

How should stop-loss points be set during trading? If entering from the neckline price, it’s recommended to use the right shoulder price as the stop-loss; if entering from the right shoulder, then use the head’s price as the stop-loss. For profit targets, short-term traders usually set them at 2 to 3 times the stop-loss distance.

However, I must remind you that technical patterns are not 100% reliable. I’ve seen too many cases where patterns are directly invalidated by fundamental changes. The Tencent example is typical—just as the right shoulder was forming in early December, preparing for a rebound, the company suddenly announced policies to crack down on the gaming industry at the end of the month, causing the stock to plummet over 12% in a single day, invalidating 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.

Therefore, patterns like head and shoulders are only reference indicators. Statistically, such formations tend to have certain tendencies, but you should never follow them blindly. It’s essential to combine fundamental analysis, market sentiment, and other factors to improve the success rate.