Inverse Head and Shoulders Pattern

An inverse head and shoulders pattern is a popular technical chart that indicates a potential trend reversal in the price of a security or asset from a negative trend to an upward trend. 

The pattern is shaped like a person's head and two shoulders reversed, with three consistent lows and peaks. The chart is designed to indicate a possible reversal in a downtrend, signalling a prospective bullish trend.

What is Inverse Head and Shoulders Pattern?

It is identical to the conventional head and shoulders pattern but inverted: the head and the shoulders top are used to anticipate downtrend reversals.

This pattern is recognized when a security's price action exhibits the following characteristics: 

  • The price falls and then rises; 
  • the price falls below the previous trough and then rises again; 
  • and finally, the price falls but not as far as the second trough. 

Once the final trough is reached, the price begins to rise, aiming for resistance near the tops of the previous troughs.

How To Read the Inverse Head and Shoulders Pattern?

The occurrence of such a pattern denotes the end of a bearish phase and the beginning of an uptrend. When the uptrend breaks through the resistance line, traders enter a long position. They would be looking for an increase in volume to validate the trend shift.

Such patterns frequently arise in trendlines, and because they share many traits with head and shoulders in an uptrend, they are read similarly.

The inverse head and shoulders are known as a strong pattern that allows traders to see the new resistance and stop-loss levels. To determine a proper profit objective during trading, traders calculate the distance between the bottom of the head and the neckline. Although some aggressive traders would place a stop-loss just below the right shoulder of the inverse head and shoulders, the most common method is to place it below the second trough.

Advantages

The first and third troughs are known as inverted shoulders, while the second is known as the inverted head. When the price rises above the upper resistance level following the inverted right shoulder, traders who recognise the pattern enter a bull position. When the stock index rises above this level, it indicates a more rapid rise. The breakthrough is also confirmed by an increase in volume.

The length of the bull run can be calculated by calculating the distance between the bottom of the head and the neckline; this is likely to be the same distance that the stock or index travels upward on a breakout.

Nature

In general, such a pattern is bullish. This is not to say that every inverse head and shoulders pattern will result in a profitable long transaction. We'll look at what a failing inverse head and shoulders design looks like going ahead.

To summarize, traders are seeking to trade this pattern as a bullish pattern because it is considered a reversal pattern in a downtrend. You must follow some specific entry and risk management criteria to trade successfully.

The inverse head and shoulders chart is a simple but popular trading chart pattern. To trade it successfully, you must first comprehend the fundamentals of the trading method and the pattern. Many traders will try to predict the trade before it is complete. You may consider the following points-

  • You may time your entry into the head and shoulders pattern by doing a few things. 
  • Buy the pattern's "head" when it rallies back through the low of the first shoulder (although you'll have to wait through the right shoulder formation and put your stop below the pattern's head).
  • If the right shoulder finds support in the same place as the first but does not create a new low below the "head," buy it.
  • Set your stop just below the second shoulder or just below the skull.
  • Buy the break out of the neckline. This may result in a higher success percentage but makes determining where your stop out will be tough.
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