Recently, while organizing my trading notes, I rediscovered some old technical analysis concepts and realized that many people still don’t quite understand the head and shoulders top and bottom patterns. So I decided to整理一些自己這些年的心得，希望能幫大家少走點彎路。

First, let’s talk about the head and shoulders top, which is a bearish signal. Simply put, it’s when the stock price forms three relatively high points, called the left shoulder, head, and right shoulder. When the right shoulder fails to break through the previous high of the head, it indicates that the upward momentum is weakening. I’ve observed many cases; Tencent is a classic example. It started rebounding at the end of 2022, formed the head in January 2023, and the right shoulder in March, with the stock price around 415. By the end of April, when the price broke below the so-called neckline, at about 360 yuan, many people didn’t react immediately, and the price nearly a year afterward never surpassed that level again.

The core logic of the head and shoulders top is like this: when the left shoulder forms, some traders take profits, but others remain optimistic and continue buying. When the head forms, buying pressure weakens, selling increases, and the price reverses. When the right shoulder forms, those who bought at the lows want to average their costs, so they keep buying during the rebound. But if the price can’t reach the previous high, a right shoulder is formed. Once the price breaks below the neckline, the original support turns into resistance, and it’s time to decisively exit.

If you want to profit from shorting based on the head and shoulders top, the key is to set three points: entry, exit, and fulfillment. The entry point is when the price breaks below the neckline. The exit point requires special attention to the neckline; once the price rebounds and breaks above the neckline, you should close your position immediately. For the fulfillment point, I usually calculate it based on the distance from the entry to the head. For example, in Tencent’s case, 415 minus 360 equals 55 points, so I set the fulfillment at 305. In practice, it only took about a month to reach the fulfillment point, which is much more efficient than holding a short position long-term.

After discussing the bearish head and shoulders top, let’s move on to the bullish head and shoulders bottom pattern. This pattern is basically the inverted version of the head and shoulders top. It indicates that selling pressure is weakening and new buyers are starting to enter.

The left shoulder of the head and shoulders bottom is actually the last rebound during a downtrend. Many bottom-fishers try to guess the bottom, but honestly, no one can know the exact bottom before it forms. As more people stop-loss out, more start entering to buy the dip, and the price begins to rebound. If this high doesn’t surpass the previous high, the low point is very likely to be lower than the previous one.

The head is the lowest point of the entire decline. Usually, trading volume at this point is very small because most sellers have already exited. At this stage, the rebound faces almost no resistance, and small buy orders can push the price up. If the price can break through the neckline directly, it’s a V-shaped reversal; if not, a right shoulder will form.

The formation of the right shoulder signals that an upward trend is about to emerge. The low point being higher than the previous one shows that there are buyers protecting the market—these could be traders who believe the rally will continue or short-sellers taking profits. Either way, this reduces selling pressure and boosts upward momentum.

Regarding buy points for the head and shoulders bottom pattern, I generally look at two opportunities. The first is to buy immediately after the right shoulder is confirmed, because the gradually rising lows usually mean the highs will also rise. This signal is relatively cheap; the risk is high but the potential reward is significant. The second is to buy after the price breaks through the neckline; at this point, the upward trend is confirmed, and the risk is relatively smaller, but you might miss the absolute bottom.

If you use the head and shoulders bottom pattern for trading, your stop-loss should be set below the right shoulder, and your take-profit can be set at 2 to 3 times the stop-loss distance. Even with a win rate of only 30%, this approach can still be profitable on average.

But one very important thing to note: all technical patterns are just tools to improve win probability; they cannot guarantee profits 100%. I’ve seen too many cases where a sudden fundamental change destroys the pattern entirely. Tencent is an example: at the end of 2023, it looked like it was about to rebound, but then the government suddenly released news, causing a 12.3% drop in a single day, completely invalidating the pattern.

Another point is that assets with very low trading volume are not very suitable for pattern analysis. Patterns are fundamentally based on statistics; the larger the sample size, the more accurate the results. Therefore, large-cap stocks are more suitable than small-cap stocks, and indices are more suitable than individual stocks.

Ultimately, head and shoulders top and bottom patterns are just reference indicators, telling you what is statistically likely to happen when certain conditions appear. But you shouldn’t blindly trust them. To truly improve your trading success rate, you need to combine fundamental analysis, market environment, and other factors. Technical analysis is just a tool; how you use it is the key.