Key results
- Total return
- +13.6%
- Buy & hold: +136.4%
- Annual return (CAGR)
- +1.3%
- Buy & hold: +9%
- Max drawdown
- -8.3%
- Buy & hold: -41.9%
- Win rate
- 43.75%
- Profit factor
- 1.49
- Trades
- 32
- Longest losing streak
- 4 trades
- Period
- Oct 4, 2016 to Oct 1, 2026
- 10 years
- Market
- DAX/EUR
- 4-hour
Equity curve vs buy & hold
Returns year by year
| Year | Return | Trades |
|---|---|---|
| 2016 | +3% | 1 |
| 2017 | -4.4% | 3 |
| 2018 | +2.9% | 4 |
| 2019 | -0.1% | 3 |
| 2021 | -3% | 2 |
| 2022 | +2.7% | 7 |
| 2023 | +10.2% | 5 |
| 2024 | +5.3% | 2 |
| 2025 | -1.3% | 1 |
| 2026 | -1.4% | 4 |
Calendar years, compounded from monthly results. The first and last years can be partial.
The head and shoulders is probably the best-known reversal pattern in technical analysis: three peaks with the middle one highest, and a "neckline" joining the two troughs. A break of that neckline is read as the end of the trend, with a target often set at the height of the pattern projected from the break, as explained in this head and shoulders guide. The inverse version, three troughs, signals a bottom. We tested both on ten years of 4-hour DAX data.
The rules we tested
- Market and timeframe: the DAX index (in euros), 4-hour candles.
- Period: 4 October 2016 to 1 October 2026.
- Short entry: a head and shoulders top is detected and confirmed by a breakout through its neckline.
- Long entry: an inverse head and shoulders is detected and confirmed by a breakout through its neckline.
- Stop-loss: 1.5% from the entry. Take-profit: 3% from the entry, twice the risk.
- Exit: the stop or the target. An opposite pattern signal would also close and reverse the trade (it happened once).
- Costs and sizing: 0.02% commission per side, full position size on a 10,000 starting balance.
What the backtest shows
The first number to read is the trade count: 32 trades in ten years. Everything else on this page should be weighed against that. With so few trades, two or three outcomes going the other way would change the picture.
With that caveat, the trades themselves behaved as designed. 44% won, the average win (2.97%) was close to twice the average loss (1.54%), and the profit factor was 1.49. 14 trades reached their target, 17 hit their stop and one closed on a signal. The maximum drawdown was only 8.3%.
But the account grew just 13.6% in ten years (1.3% a year), while holding the DAX returned 136.5% (9.0% a year), with a 41.9% drawdown along the way. The strategy was in the market only a few times a year, so it barely took part in the index's long rise.
The yearly table shows how thin each year is. 2023 was the best (+10.2% on 5 trades, 4 of them winners), followed by 2024 (+5.3% on 2 trades, both winners). 2017 lost 4.4% on 3 trades, all losers. 2020, a year with large moves on the DAX, produced no trade at all.
32 trades is a small sample
A profit factor of 1.49 looks encouraging, but it rests on 32 trades. Treat it as a hint worth investigating, not as a measured edge.
Why it works a little, and why it is hard to use
Waiting for a confirmed neckline break filters out many patterns that never complete, and a 2:1 bracket means the strategy only needs to win about a third of its trades. That is why the few trades it took were profitable overall. The cost is rarity: a strict pattern definition on a 4-hour index chart produces about three signals a year. On a market that rose for most of the decade, a strategy that also shorts tops and sits in cash most of the time cannot compete with simply holding.
What you could test next
- Run the same rules on the 1-hour chart to collect more patterns and a more meaningful sample.
- Apply them to several indices at once (DAX, S&P 500, Nasdaq 100) to see if the edge holds across markets.
- Keep only the inverse head and shoulders (long side) on an index with a long-term upward drift.
- Replace the fixed 3% target with a trailing stop, so a real reversal can run further.
Methodology and assumptions
- Starting capital
- 10,000
- Position size
- 100% of equity
- Commission
- 0.02% per side
- Data window
- Oct 4, 2016 to Oct 1, 2026
- Run date
- October 2, 2026
- No repainting: every signal is computed on closed candles only, so the backtest never acts on a price a trader could not have seen yet.
- Past performance does not predict future results. A backtest is a historical simulation, not a forecast.
Frequently asked questions
How do you trade a head and shoulders pattern?
The classic method waits for the neckline to break. In this test the strategy sells short when a head and shoulders top is confirmed by a break of its neckline, and buys when an inverse head and shoulders is confirmed, with a stop 1.5% away and a target 3% away.
How reliable is the head and shoulders pattern?
On the DAX 4-hour chart over ten years, 14 of 32 trades reached their target and 17 hit their stop. The profit factor of 1.49 is positive, but with so few trades a handful of outcomes could change the conclusion.
How often does a head and shoulders pattern appear?
Rarely, once the rules are strict. The detector found 32 tradable patterns in ten years on the 4-hour DAX, about three a year, and none at all in 2020.
Is the inverse head and shoulders more profitable than the regular one?
This page reports both directions together. To compare them, you would need to test each side on its own, keeping in mind that each would have even fewer trades.
Reproduce it, then change it
Every number on this page comes from the Backtrex engine. Rebuild the strategy in the app, then change the market, the timeframe or a parameter and see whether the result holds.
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