## Don't Be Fooled by Stock Prices Anymore: Recognize Exit Signals from Head and Shoulders Top

Technical analysis of stocks features a classic pattern called **Head and Shoulders Top**, which essentially indicates that the stock is struggling to reach new highs, eventually forming three peaks—left shoulder, head, and right shoulder. If you see this pattern, it often signals an upcoming correction.

### Why does the Head and Shoulders Top form? Market psychology gives you the answer.

When the stock price rises to form the left shoulder, some investors take profits, while others remain optimistic and add to their positions. However, trading volume gradually diminishes—because everyone wants to sell at the peak. When sell orders surpass buy orders, the head is formed, and the price reverses downward.

Subsequently, some investors may buy the dip at the neckline (many of whom bought high earlier, aiming to average down). The price might rebound, but if this rebound fails to surpass the high of the head, the right shoulder is officially formed. At this point, market sentiment shifts dramatically: everyone starts rushing to escape.

### Tencent Case: Missing a Signal Turns Profits into Losses

Tencent began rebounding at the end of 2022, formed the head in late January 2023, and the right shoulder appeared in March. The critical moment came—when the stock price broke below the neckline in late April, rational traders should have sold immediately, at around 360 yuan.

What happened next? The stock price continued to fall to the 200s. Missing that escape wave, they could only exit at a lower price, accepting losses.

### Two Signals for Practical Exit

**Signal 1: Sell as soon as the right shoulder forms**—if you see "not surpassing the previous high," and the price drops below the neckline, don't hesitate—consider selling immediately.

**Signal 2: If you missed the first chance, there's a second**—observe whether the price rebounds back above the neckline. If it doesn't break through, you should sell as well.

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## Conversely: Head and Shoulders Bottom is the Reversal Signal

The Head and Shoulders Bottom is just the upside-down version of the Head and Shoulders Top. This pattern indicates not weakening selling pressure but new buying momentum, signaling a bullish trend.

At the bottom formation, trading volume is usually very low (most sellers have already cut losses). Small buy orders can push the price higher. Once the price breaks through the neckline resistance, that former resistance line becomes a support level—because buyers will step in around this price zone to defend the position.

### Two Buying Signals

**Signal 1: Buy as soon as the right shoulder appears**—higher lows imply higher highs. The risk is relatively higher, but the price is cheaper.

**Signal 2: Buy after the price breaks through the neckline**—confirmation of an upward trend, lower risk but possibly missing the absolute bottom.

### How to Set Stop-Loss and Take-Profit Points

After entering, set a proper stop-loss. If entering at the neckline, use the right shoulder's price as the stop-loss; if entering at the right shoulder, use the head's price as the stop-loss.

For take-profit, set it at 2-3 times the stop-loss distance. Even with a win rate of only 30%, this statistical approach can still keep you profitable.

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## Important Reminder: Technical Patterns Have Blind Spots

Patterns are just tools to improve your win probability, not foolproof formulas.

**Fundamental changes can directly invalidate the pattern**—for example, Tencent planned a rebound at the end of 2023, but the government suddenly introduced new regulations targeting the gaming industry, causing the stock to plummet 12.3% in a single day. All technical patterns instantly became invalid.

**Illiquid stocks are unsuitable for pattern analysis**—patterns are statistical in nature; the larger the sample size, the more accurate. Large-cap stocks and indices are more likely to form regular patterns than small-cap stocks or individual shares.

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## Bottom Line Thinking

Whether it's a Head and Shoulders Top or Bottom, their core value lies in helping you assess probabilities. Based on historical data, these patterns tend to be associated with higher chances of decline or rise, respectively. But probability is not certainty.

The smartest approach is: use these patterns as part of your decision-making process, combined with fundamental analysis and risk management, to sustain profits in the market. Don't blindly follow patterns, but also don't ignore them entirely.