Algorithmic head-and-shoulders construction with bounded exits

Locate milestone-points and draw the neckline

A mechanical head-and-shoulders detector can locate the pattern's key points, draw a neckline when those points satisfy the stated conditions, and place a setup label after the last qualifying bar. Those key points are the milestone-points the detector must locate and test against pattern conditions before a neckline or setup label is drawn.

A head-and-shoulders top can be stated as three peaks in which the middle peak is higher than the two outer peaks. In the sense used here, head-and-shoulders is a three-peak or three-trough price structure whose middle extreme is more pronounced than the two flanking extremes, with a neckline through the intervening troughs or peaks used as the confirmation line.

Find peaks and troughs with a percentage-reversal

Peaks and troughs for that geometry can be found by requiring a percentage-reversal in the high or low series at least as large as a chosen reversal amount. A percentage-reversal registers a peak or trough only after price retraces at least a stated percentage from a new extreme.

Inspect the same geometry on a chosen interval

Implementations expose chart-level parameters for price source, maximum pattern length, and neckline display so the same geometry can be inspected on a chosen bar interval and lookback. The neckline is the line through the two intervening troughs of a topping structure, or the two intervening peaks of a bottoming structure, extended forward as the confirmation threshold.

Extra filters add degrees of freedom

Adding extra pattern filters can reduce the number of signals and each extra variable or constant adds a degree of freedom to the resulting system.

Enter on a neckline break

A complete mechanical rule set can enter when an imaginary neckline through the two shoulder troughs, extended to the right, is broken, then exit at a measured objective or when price produces a failed break.

Scan completed and emerging patterns

The same geometry can be scanned for completed and emerging tops and for completed and emerging inverse bottoms, with reports that list every nonzero pattern flag. An emerging-pattern is a partially formed head-and-shoulders geometry that a scanner can flag before the neckline break completes.

Reuse the geometry as a pullback in trend

After the pattern is coded, it can be reused as a pullback long when a 50-day simple moving average is above a 200-day simple moving average and the head-and-shoulders setup confirms. That reuse is a pullback-in-trend: a completed topping geometry used as a long entry when a longer moving-average pair still defines an uptrend.

That construction places a trailing-stop at three times a 39-day average true range from the close, with entry on the following day's open. The trailing-stop trails a multiple of average true range from the close so the loss bound moves with realized volatility after entry.

Unit size can be set with a fixed-fractional money manager that risks 0.05% of total equity per trade when the book is a large equity index membership list. That atr-position-sizing rule scales the unit from account equity and a volatility-based stop distance so each trade risks a stated share of equity.