Inverse Head and Shoulders Pattern Trading Strategy Guide

The accuracy of the inverse head and shoulders pattern increases if the price consolidates for a long period before breaking out of the neckline. The effectiveness of the inverse head and shoulder pattern in technical analysis is affected by the trader’s skill and experience, market conditions, and the use of confirmation before placing trades. The effectiveness of the inverse head and shoulders pattern is highest among traders who regularly backtest the pattern using historical data.

The pattern resembles the shape of a person’s head and two shoulders in an inverted position, with three consistent lows and peaks. The chart aims to identify a potential reversal in a downtrend, indicating a possible bullish trend. The Inverse head and shoulders pattern’s significance extends to its psychological insights into market sentiment. Traders gain valuable information about the shifting dynamics between buyers and sellers in the market through the observation of an inverse head and shoulders formation.

PNC Infra- Inverted Head and Shoulder Pattern

An inverse head and inverted head and shoulder pattern shoulders pattern is considered bearish to bullish. The traditional head and shoulders pattern has similar characteristics as the inverse pattern. The key components are the left shoulder, head, right shoulder and neckline. However, it is a bearish reversal pattern which signals a previously rising stock may fall. It’s important when trading a reverse head and shoulders pattern to allow the formation to complete. Similar to the traditional pattern, this happens when price action breaks above the neckline after the right shoulder.

Inverse Head and Shoulders Pattern: Meaning, How it Works, and Trading

To confirm the price breakout (1), a trader could have used a volume indicator. In the reverse head and shoulders chart above, the volumes rose when the price broke above the neckline (2). The 14-day moving average moved above the 21-day MA before the breakout (3). The inverse head and shoulders pattern offers traders clear entry and exit points with well-defined price levels for setting stop-loss orders and measuring the target price.

• The pattern begins with a downtrend with two lower lows (1 & 3) and two lower highs (2 & 4) which form the first and second bottom.
• High volume confirms that the pattern is not a false breakout, thereby increasing the reliability of the trade signal.
• In the reverse head and shoulders chart above, the volumes rose when the price broke above the neckline (2).
• The post-breakout performance of a continuation Inverse H&S may not be as impressive as it does from a bottom reversal pattern.

What is an Inverse Head and Shoulders Pattern?

While we don’t recommend this, we’ll offer a few cheat entries for consideration. Carefully analyzing each component helps traders reliably spot reverse head and shoulders and the upcoming trend reversals they precede. This line marks the key resistance level the price needs to break to complete the reverse head and shoulders pattern. The inverse head and shoulders pattern forms within a prevailing downtrend – a period of lower swing highs and lower swing lows.

In other words, the second low in the pattern must be lower than the first and third low. To protect yourself from this situation – when you enter a position at the breakout, it is advisable to place the stop loss market order at the lowest level of the right shoulder bottom. Moreover, it is also advisable to get it further confirmed from other technical indicators. The risk with this approach is that there’s a high chance of experiencing a false breakout ( or a price pullback), and the stop loss will get triggered. So, buying pressure is likely to resume when the price breaks out of new highs and buying pressure is renewed. Because how the “right shoulder” forms is a key criterion to whether you want to trade the breakout, or not.

• The inverse head and shoulders pattern is a powerful tool for identifying market reversals.
• During the breakout of the neckline, a significant increase in volume as the price breaks above the neckline is a strong confirmation signal.
• Now that you know what the inverse head and shoulders is, let’s look at how to properly identify it and the key components to analyze.
• The inverse head and shoulders pattern stands as one of technical analysis’s most powerful and reliable formations.
• During the downtrend, bulls will wait on the sideline waiting for the stock to find support.
• When the market forms a head and shoulders pattern, you can expect the price to reverse.

So if you want to trade the market reversal, give the chart pattern at least 100 bars to form. On the USD/CAD 4-hour chart, an inverse head and shoulders formed in July 2022. The left shoulder bottomed on June 27th, the head bottomed on July 14th, and the right shoulder bottomed on July 31th. For professional-grade stock and crypto charts, we recommend TradingView – one of the most trusted platforms among traders.

What is the history of Inverse Head and Shoulders?

High volume on the breakout is a sign of strong buying pressure, which confirms the trend reversal. On the other hand, low volume can signal any breakout will be short-lived. Traders find it crucial to know the profit target of this chart pattern.

We’re also a community of traders that support each other on our daily trading journey. The pattern begins with a downtrend with two lower lows (1 & 3) and two lower highs (2 & 4) which form the first and second bottom. Traders typically enter into a long position when the price rises above the resistance of the neckline. An Inverse Head and Shoulders, also called a “Head and Shoulders Bottom” is a reversal chart pattern. The inverse head and shoulders stop-loss target is usually placed below the head low or the right shoulder low. In order for an inverse head and shoulders to qualify as such, it must create two “shoulders” and a “head”.

However, traders should always be cautious trading off of still-forming patterns. The first step in trading an inverse head and shoulders pattern is to identify the pattern. This involves looking for the lead-in downtrend, the inverse head and shoulders formation, and the potential reversal breakout above the neckline resistance. There is no specific volume for an inverse head and shoulders pattern.

Next time, in the inverse head and shoulders pattern, selling volumes should increase, so the price will break below the previous low and form another one (2). In the third attempt, bears will pull the price down but won’t be able to reach the previous low (3), and the price will rebound almost at the same level as the left shoulder. After it has formed, bulls are likely to push the price above the resistance level.

How do you exit your winning trades?

If you have the discipline to manage your risk and the ability to take a losing day without blowing your account then you should get far. They support futures trading across multiple trading platforms and will answer questions the best that they can when it comes to technical issues and more. Then the Reverse H&S is probably forming as a consolidation before the market continues the prevailing downtrend. Whatever the post-performance may be, if it does an upside breakout in an uptrend it gives a long opportunity. This formation may develop in an uptrend when the price takes a breather (or pause) before the continuation of the prevailing trend.

No, the inverse head and shoulder pattern is not better than the cup and handle pattern. Counter-traders use the inverse head and shoulders pattern when looking to execute trades in markets that are still in long-term bearish trends. Fibonacci traders use the retracement and extension levels as the target for the inverse head and shoulders patterns. Fibonacci extension levels like 127.2%, 161.8%, and 261.8% enable traders to move the price targets higher if the bullish reversal experiences higher momentum, enabling them to secure higher profits.