Meaning Of Inverse Head and Shoulder Pattern

Inverse Head and Shoulder Pattern

The formation of the trendline's head and shoulders pattern indicates an uptrend reversal. Inverse head and shoulders patterns in a downtrend are also indicative of a bearish to bullish trend reversal. The inverse head-and-shoulders pattern is similar to the head-and shoulders pattern and can be easily identified in all time frames.

When the asset's price falls to a bottom, it rises again, falls again, but this time it is more steep than the first. This creates an inverse head-and-shoulders pattern. The price of the asset drops again, and then it rises again.

Key Takeaways

- Inverse head and shoulder formation is similar to head & shoulders formation but it's reversed

It has many similarities with head and shoulders. There are three troughs, with the second and third being deeper than the middle.

Inverse head-and-shoulders pattern is seen in the downtrend

Once the formation is complete, it signals a bullish market.

- Once the third rise reaches the neckline, traders look for a sharp price increase

How to Read an Inverse Head and Shoulders Pattern

The end of a bearish phase is indicated by an inverted head and shoulders pattern. This signals the onset of an upward trend. When the resistance line is broken, traders will enter a long position. To confirm a trend change, traders would look for an increase in volume. The trendline often shows an inverted head-and-shoulders pattern. Because it shares many characteristics with the uptrend's head and shoulder, it can also be interpreted in the same way.

The robust Inverse Head and Shoulders pattern allows traders to visualize the stop-loss and new resistance. To set a profit target, traders measure the distance between the neckline and the top of the head. While some traders may place their stop-loss below the right shoulder of the inverse heads and shoulders, others will place it below the second.

If an inverted head and shoulders appears

After a long bearish trend, an inverted head and shoulders is seen

If it is accompanied by an increase of trading volume, this indicates a trend reversal

- New lows are formed during the formation. This indicates that the market was trying to fish for the floor.

- When the market is unable to support the price, the price falls. It then rises again

Traders must also consider the trend. If the inverse head-and-shoulders pattern doesn't occur in a downtrend it is not a trend reverser.

The inverse head-and-shoulders pattern is a signal that traders are entering a long position. Before we get into the trading strategy in more detail, let's go over each component in greater detail.

Left shoulder: This is the first trough in the current trend. The resistance level is broken when the market rises again.

Head: The second trough is a lower level than the previous one. Sometimes, the highs in the rise can also break the downtrend.

Right shoulder: This third low is above the second, creating the right shoulder. It is often in the line of your left shoulder, or symmetrical. Symmetry is preferable, but it is not always possible. The formation is complete when the right shoulder crosses the neckline.

Resistance: A line connecting the high 1 (high 2) and high 2 (high 1) is called the neckline. High 1 marks the point at which the left shoulder rise ends and the head begins. High 2 is where the right shoulder starts and the head ends.

Volume Volume is crucial to confirm the reversal. While it's not necessary for the head-and-shoulders pattern, an expansion in volume is essential for the inverse formation. It is not a reversal pattern if it doesn't include an expansion of volume.

Support Line: When the resistance line has been broken, it becomes new support. The pattern doesn't end when the trendline crosses the neckline. In an uptrend, the price will often drop to the support line in order to give traders another chance to buy.

Price Target: The inverted head and shoulders pattern allows traders to calculate a profit target that is suitable for them by measuring the distance between their head and the neckline. To set a profit target, it is placed on the opposite side to the neckline in an uptrend.

Inverse Head and Shoulder Trading

The popular inverted head and shoulders formation indicates major trend reversal during a downtrend. When the pattern appears at the price line, traders enter a long position. However, there are many ways to trade in inverse heads and shoulders.

Aggressive Trading

A few traders will jump at the chance to buy when the trendline breaks resistance. They may place a stop-buy just above the neckline of the inverse pattern. This strategy can lead to a false break and prices can slip again.

Conservative Trading

Traders have the option to wait for the pattern's completion and then validate the reversal by closing above the neckline. This can negate any price retrace chance and minimize slippage. He can also place a limit order at the broken neckline. There is a downside to this. If the pullback does not occur, waiting for a retrace could mean you miss out on buying opportunities.

Summarising inverse head and shoulders

The market is volatile when there is an inverted head-and-shoulders pattern. This pattern suggests that the bull is trying to overtake the market, while the bear resists by driving the asset price down. When the price falls for the third consecutive time, it then rises to break its neckline. This confirms that bull has taken control. To confirm trend reversal, however, the phase must see a significant rise in trade volume. The pattern doesn't signify a trend reversal if there isn’t an increase in volume.

Conclusion

The trend reversal pattern of inverted head and shoulders has been confirmed. When the asset rallies to the point where the right shoulder crosses the neckline, the pattern is complete. Because bull has established an uptrend and is in control of the market, traders take a long position. This is a solid format that traders can use to plan their entry at the neckline of the formation, and then place stop-loss below right shoulder. However, one must be prompt enough to recognize the pattern and take a position. A price drop in an uptrend is quite common, which allows traders to purchase again, but it is not always guaranteed.