Quick Reference for Stock Technical Patterns: Quickly Master the Key Tips for Head and Shoulders Top Exit and Head and Shoulders Bottom Buy Points

When it comes to technical analysis, many traders have heard of the classic patterns “Head and Shoulders Top” and “Head and Shoulders Bottom,” but few can actually use them correctly. This article will approach from a practical perspective, dissecting the market psychology behind these two patterns, and how to set entry points, exit points, and satisfaction points for precise trading.

Understanding the Deadly Power of Head and Shoulders Top Through Tencent Case

At the end of 2022, Tencent began to rebound and then hit a high of 415 yuan at the end of January 2023. But the problem arose: the price did not continue to break through, instead forming a “lower high” signal in March. By the end of April, when the price broke below a key support level, many investors realized this was a completed Head and Shoulders Top pattern—a classic bearish signal.

If you had exited at 360 yuan then, although it was below the 415 high, Tencent’s stock price never returned above 360 within the following year, dropping as low as over 200 yuan. This case illustrates a harsh truth: Recognizing the Head and Shoulders Top in time and decisively exiting is much more profitable than holding on to the bottom.

The Structural Principle of Head and Shoulders Top: The Trading Logic Behind Three High Points

The Head and Shoulders Top consists of three relatively high points—left shoulder, head, and right shoulder. But this is not just about three lines; each high point reflects changes in market participant psychology.

Formation of the Left Shoulder: After the stock price hits the first high, profit-takers start to exit, but some remain optimistic about the future. Trading volume increases, and the price slightly pulls back. The lowest point of this pullback is called the “neckline”—a critical support level.

Formation of the Head: After a re-accumulation, new buyers continue to enter, pushing the price higher. But as the price rises, buying momentum gradually weakens (since everyone wants to sell at the high), and eventually selling pressure surpasses buying pressure, forming the head and starting to reverse.

Formation of the Right Shoulder: When the price pulls back near the neckline, some buyers at the neckline continue to buy to lower their average cost. But if this rebound cannot surpass the previous high at the head, it forms the right shoulder—indicating the pattern is complete.

Note: Left and right shoulders are not necessarily equal in height, and the neckline is not necessarily horizontal—it can be sloped. Pattern morphology is based on statistical regularities, not strict geometric rules.

How to Use the Satisfaction Point in Head and Shoulders Top to Determine Exit Timing

After identifying the pattern, the key is to set reasonable exit and satisfaction points.

First Exit Signal: When the right shoulder forms (i.e., “lower high” confirmed), and the price breaks below the neckline, consider exiting immediately. For Tencent, this was around 360 yuan at the end of April.

Second Exit Opportunity: If you missed the initial neckline break, observe whether the subsequent rebound can re-approach the neckline. If it cannot break through, you should still exit decisively, because any rebound might just be a “lifeboat”—the market’s last escape opportunity.

This highlights why timely recognition of the pattern’s satisfaction point is crucial: it helps you exit before the pattern is fully invalidated and the price hits the bottom.

Head and Shoulders Short Strategy: How to Set Entry, Exit, and Satisfaction Points

If you prefer short selling, the Head and Shoulders Top can be an excellent entry opportunity. But shorting differs from simply selling; you need to monitor constantly and set three key points:

Entry Point: As mentioned earlier, enter when the price breaks below the neckline. For Tencent, 360 yuan was the short entry point.

Exit Point: When the price rises again and re-breaks the neckline, exit immediately, regardless of profit. This indicates the bearish pattern has been invalidated.

Satisfaction Point: Your profit target. Calculate it based on the distance from the entry point to the high of the head. For example, if entering at 360 yuan and the head is at 415 yuan, the difference is 55 points. Your satisfaction point should be set at 360 - 55 = 305 yuan.

In Tencent’s case, shorting at 360 and taking profit at 305 would have taken about one month (entered in April, hit target in May). Holding until now and exiting at 286 yuan, although earning an extra 19 yuan, would involve a much higher time cost compared to switching to other opportunities.

Buy Points for Head and Shoulders Bottom: The Opposite Logic of Bullish Patterns

The Head and Shoulders Bottom is the inverted version of the Head and Shoulders Top. If the top pattern indicates a price decline, the bottom pattern signals a potential rebound—correctly identifying the satisfaction point can reveal entry opportunities.

The pattern consists of three relatively low points, with analysis logic opposite to the top:

Left Shoulder: The last rebound before the bottom forms. Before the true bottom appears, no one can be sure where it is. But as more traders stop-loss and buy the dip, the price begins to rebound. If the rebound cannot break through the neckline resistance, it indicates insufficient upward momentum.

Head: The lowest point of the entire downtrend. At this stage, trading volume is minimal, and selling pressure has exhausted itself. Small buy orders can push the price up, with little resistance.

Right Shoulder: A key signal appears— the low point is higher than the previous wave. This suggests buy orders are supporting the market, and bearish momentum is weakening. If this wave can break through the neckline resistance, the neckline becomes support, and an upward trend is established.

Buy Entry Signals and Satisfaction Point Setting for Head and Shoulders Bottom

Typically, there are two buy points:

Buy Point 1: After the right shoulder forms, buy directly. The lows are gradually rising, fitting the trend of “lower lows, higher highs.” This is a relatively cheap entry, with higher risk but larger potential reward.

Buy Point 2: When the price breaks through the neckline. The upward trend is confirmed, and market pressure is alleviated. This is a safer entry but may miss the initial low.

Stop Loss: For those entering at the neckline, set the stop loss at the right shoulder price; for those entering at the right shoulder, set the stop loss at the head (lowest point).

Satisfaction Point: Short-term traders should set a profit target at 2-3 times the stop loss distance. As long as the win rate exceeds 30%, long-term profitability is achievable.

Three Practical Blind Spots in Pattern Analysis: Recognizing Risks for Longer Survival

Reiterating: patterns are statistical regularities, not 100% certainties. Common failure scenarios include:

1. Sudden Fundamental Changes: Tencent experienced this in December 2023. The pattern had completed a bottom and was ready to rebound, but a government crackdown on the gaming industry was announced, causing a 12.3% single-day plunge, instantly destroying the pattern. Technical analysis is powerless against fundamental shocks.

2. Low Liquidity Targets: Pattern analysis relies on statistical sample sizes. Large-cap stocks and indices are more suitable than small caps or obscure stocks. Illiquidity can lead to unpredictable movements and pattern failure.

3. Execution Risks and Psychological Traps: Knowing the theory and executing it are two different things. Many people, when approaching the satisfaction point, become greedy for more or get scared by volatility and exit early. Setting clear entry, exit, and satisfaction points and sticking to them with discipline is essential.

Summary: Head and Shoulders Top and Bottom Are Just Your Trading Tools

Head and Shoulders Top and Bottom are among the most classic patterns in technical analysis. The top helps you identify exit opportunities, the bottom helps you find entry points, and the satisfaction point ensures you don’t overtrade or become greedy.

But remember: patterns are only references; the market always has low-probability events. Combining pattern analysis with fundamental judgment, risk management, and psychological resilience is the correct way to achieve long-term profitability.

Choose the right pattern, set a good satisfaction point, and execute with conviction—if you do these three steps, you have already surpassed most retail traders.