What Is The Inverse Head And Shoulders Chart Pattern?
An Inverse Head and Shoulders pattern, also called an inverted head and shoulders, is a bullish reversal pattern, most commonly found at the bottom of a trend.
The pattern consists of a lower trough acting as the left shoulder, a larger trough acting as the head, and another lower trough roughly around the same depth as the first shoulder, acting as the right shoulder. The neckline of the pattern acts as resistance.
How To Identify The Inverse Head And Shoulders Pattern?
Price action forms the shape of an upside down head atop two upside down shoulders, with three total troughs.
The left shoulder and first trough is formed on high volume. Volume begins to decline with a higher trough forming a head.
Finally, a right shoulder of roughly equal depth as the left shoulder is formed. The pattern is confirmed with a close above neckline resistance.
What Is The Psychology Behind The Inverse Head And Shoulders Pattern?
The Inverse Head and Shoulders pattern is a bullish chart pattern that can provide traders with valuable insights into the market’s psychology.
It’s characterized by a trough (the head) between two smaller troughs (the shoulders), with a neckline connecting the highs of the two shoulders.
The pattern typically takes several weeks or months to form and is a sign of a potential trend reversal. Traders interpret the pattern as a sign of accumulation, where buyers are building up their positions before pushing the price higher.
The psychology behind the inverse head and shoulders pattern is that there is a tug of war between buyers and sellers. The left shoulder represents a failed attempt by sellers to push the price lower, followed by a temporary bounce.
The head represents another attempt by sellers to push the price lower, which is again followed by a bounce. Finally, the right shoulder represents a weaker attempt by sellers to push the price lower, which is followed by a more significant bounce.
Traders view the pattern as a sign that the buyers are gaining control of the market, and sellers are losing momentum. Once the price breaks above the neckline, it’s a signal that the trend has reversed, and traders may enter long positions.
How To Trade The Inverse Head And Shoulders Pattern?
To trade the Inverse Head and Shoulders pattern, traders typically wait for the price to break through the neckline with a strong volume surge.
The breakout should ideally occur on higher than average trading volume, as this confirms that there is significant buying pressure behind the move.
Traders may enter a long position once the price breaks above the neckline, with a stop loss placed below the right shoulder.
Alternatively, traders may wait for a throwback to the neckline before entering a long position. This approach can provide a better risk-to-reward ratio, as the entry price is closer to the neckline and the stop loss can be placed tighter.
However, it may also result in missing out on some of the initial gains from the breakout. Ultimately, the best approach will depend on the trader’s risk tolerance, trading style, and market conditions.
It’s worth noting that the inverse head and shoulders pattern can also result in a false breakout, where the price briefly breaks through the neckline before reversing course.
Inverse Head And Shoulders Performance Expectations Explained
A bullish reversal is expected the majority of the time.
To find potential targets, measure from the neckline to the lowest trough forming the head.
Project the measurement multiplied by 71% to the neckline.