## Stock Price Pattern Code: Mastering the Profit Mechanism of Head and Shoulders Reversal

In the world of technical analysis, **Head and Shoulders Top** and **Inverse Head and Shoulders** are two of the most predictive reversal signals. They suggest, through specific price movement arrangements, that the market is about to shift from an uptrend to a downtrend or vice versa. If candlesticks are the language of investors, then these patterns are real-time reflections of market psychology.

### Understanding Head and Shoulders Top: From Celebration to Flight

The formation process of **Head and Shoulders Top** reflects subtle changes in market participants' mentality. When the stock price hits the first high point (left shoulder), investors begin to differentiate: some take profits during the rally, while others remain optimistic about the future. Trading volume starts to increase, and the price experiences a slight decline until it drops to the previous low—this seemingly ordinary support line is actually the **neckline**, which will play a crucial role in subsequent developments.

Then, a new round of buying pushes the price higher, but strange signs begin to appear: despite reaching new highs, trading volume gradually diminishes. This indicates increasing selling pressure and a breakdown of market consensus. When selling pressure finally overwhelms buying, the head forms, and the price begins to turn downward.

As the price falls back near the neckline, a group of investors who bought at the lows start a "cost basis battle"—they did not exit at the head and now attempt to average down by continuing to buy. If this rebound's high still cannot surpass the previous high, the right shoulder is formed, completing a full **Head and Shoulders Top** pattern.

Subsequently, once the price breaks below the neckline, the support turns into resistance, and collective psychological collapse begins. Any rebound becomes a "panic wave," with holders selling off near cost, causing the price to plummet.

### Practical Trading Signals for Head and Shoulders Top

**Clear sell signals** usually appear in two stages:

The first signal occurs when the right shoulder forms and the high cannot be surpassed. Once the price breaks below the neckline, consider reducing or closing positions immediately. This is the most explicit risk signal.

If you miss this opportunity, observe subsequent rebounds. When the price rebounds and approaches the neckline, reassess whether a new pattern is forming. If no new pattern appears, decisively exit during the rebound.

Taking Tencent stock as an example, during the rebound starting at the end of 2022: the left shoulder formed in November, the head was reached at the end of January 2023, and the right shoulder was completed by the end of March. When the price broke below the neckline around 360 yuan at the end of April, investors should have exited. Although still far from the peak of 415 yuan, the price remained below 360 yuan for nearly a year, currently hovering in the 200s.

By the end of 2023, Tencent seemed to have a rebound opportunity, but a sudden regulatory policy by the Chinese government caused a 12.3% plunge in one day, instantly destroying the pattern. This case reveals an important truth: **Major changes in fundamentals can invalidate all technical patterns**.

### Three Key Points for Short Selling Setup

For short sellers, **Head and Shoulders Top** offers an ideal entry point. But unlike simple selling, shorting requires continuous monitoring. Setting three critical points is essential:

**Entry point** is when the price breaks below the neckline.

**Exit point** must be when the price re-breaks above the neckline. Once broken, close the position immediately, as the downward momentum may have shifted.

**Fulfillment point** is based on the distance from entry to the head. Suppose the head is at 415 yuan, and the entry is at 360 yuan, the distance is 55 points. The fulfillment point should be set at 360 - 55 = 305 yuan. Taking Tencent as an example, entering in April and exiting in May, the setup takes only about a month. If you continue shorting until now, even if the price drops to 286 yuan, the profit is only 19 yuan, which is not worthwhile.

### The Other Side of Reversal: The Uptrend Code of Inverse Head and Shoulders

**Inverse Head and Shoulders** is the mirror image of **Head and Shoulders Top**. The left shoulder represents the last rebound in a downtrend, with the market unaware of where the true bottom lies. As more investors stop-loss and exit, bottom-fishers increase, and the stock begins to rebound.

The key point: if the rebound high cannot reach the neckline, the lows will likely create new lows. During this phase, volume decreases from large to small until the price hits the lowest point—the head of the inverse pattern. At this point, volume is minimal, and selling pressure is nearly exhausted, while buying pressure is brewing.

Subsequent rebounds face little resistance; small buy orders can significantly push the price higher. If the price can break through the neckline directly, it forms a V-shaped reversal. The formation of the right shoulder indicates a genuine bullish signal. When lows no longer make new lows and highs start to rise gradually, the market's buying power clearly surpasses selling.

### Two Buy Signals for Inverse Head and Shoulders

**First signal**: When the right shoulder confirms formation. At this point, the low is higher than the previous low, fitting the trend logic of "low not below the previous low, high must surpass the previous high." This is a relatively cheap entry point, though riskier, with greater potential reward.

**Second signal**: When the price breaks above the neckline. The upward trend is confirmed, market pressure eases, and risk is lower. Although you might miss some profits at the lows, the certainty increases.

### Stop Loss and Profit-Taking in Trading

After entering, set the stop-loss below the right shoulder. If entering at the neckline, the stop-loss is at the right shoulder price; if entering at the right shoulder, the stop-loss is at the head price.

Profit targets depend on personal style. Short-term traders can aim for "2 to 3 times the stop-loss range." Even with a win rate of only 30%, this can still be profitable statistically.

### Scenarios of Pattern Failure in Reality

All technical patterns are tools to improve win probability, not guarantees. True traders must recognize their blind spots:

**Fundamental changes** can directly invalidate patterns. Policy shifts, earnings surprises, black swan events can cause perfect **Head and Shoulders Top** or inverse patterns to fail instantly.

**Lack of liquidity** in the asset. Low trading volume means insufficient sample size, invalidating statistical regularities. Patterns in large-cap stocks are more reliable than in small caps; index patterns are more reliable than individual stocks.

**Consolidation periods with fuzzy patterns**. Sometimes the market oscillates within a specific price range, with unclear pattern boundaries. In such cases, patience and waiting are better than blind trading.

### Final Trading Wisdom

**Head and Shoulders Top** and **Inverse Head and Shoulders** are products of statistics, reflecting the collective behavior patterns of market participants. But regularity does not mean determinism. When using these tools, they should be combined with fundamentals, capital flow, policy factors, etc., rather than rigidly following "the pattern."

True profit comes from respecting the warning signals of these patterns while maintaining reverence for market uncertainty. When a pattern signals, ask not "Will it work?" but "What if it fails?" This risk-first mindset is the moat for long-term trading.