The pattern is a bullish reversal pattern that can also indicate a potential trend reversal from a downtrend to an uptrend. The best way to trade an inverse head and shoulder pattern is to start by identifying the left shoulder, head, and right shoulder. The next step is to determine an entry point based on the distance from the neckline to the head.

Inverse Head and Shoulders: What the Pattern Means in Trading

Each component plays a pivotal role in structuring the formation and contributes to the pattern’s high reliability in forecasting technical analysis outcomes. The delineation of this distinctive pattern entails a trio of troughs where the middle one, deemed the ‘head’, dips lowest, and the two flanking it, the ‘shoulders’, are less pronounced. This pivotal moment in chart analysis not only suggests a change in market direction but also serves as a strategic point for traders considering entry into or exit from positions.

1. It is also one of the most profitable chart patterns, with an average 45% price increase per trade.
2. The example we’ll get to shortly shows an inverse head and shoulders that formed on the 4 hour chart.
3. This means that you expect a $45 increase in price from the breakout point.
4. When trading an inverse head and shoulders pattern, waiting for the price to break through the neckline before entering a long position is important.
5. There are four main components of a reverse head and shoulders pattern.

The picture above demonstrates five characteristics of the inverse head and shoulders chart pattern. These in order of occurrence are downtrend, first shoulder, neckline, head, and second shoulder. When that pattern does form and the volume leading to the breakout is significant, traders can often ride the uptrend for relatively large price movements, which create large profits.

When prices are going up after the right shoulder, the breakout occurs with strong buyer volume. You can use the inverse head and shoulders pattern in combination with high volume to enter your long position. During the downtrend, bulls will wait on the sideline waiting for the stock to find support. Once the bottom is formed, the influx of buyers pushes the price up. Simultaneously, sellers have been exhausted after the long downtrend. This setup creates large potential for profit, as buying pressure completely overwhelms selling pressure.

Key Takeaways

And when you trade the Inverse Head and Shoulders Pattern in an uptrend, BOOM, you’ve just increased your odds of winning. This means the shorter the duration of the Inverse Head and Shoulders pattern, the more likely it’ll fail — especially when you’re trading it against the trend. When the pattern completes, it suggests the market has bottomed and upward momentum is likely to follow. Volume starts decreasing during the formation of the left shoulder.

Volume Importance

Traders and analysts who rely on technical analysis to predict market trends often consider the inverse head and shoulders pattern a strong indicator of potential market reversals. This bullish pattern provides a roadmap for understanding changes in market psychology from bearish to bullish sentiment. You can take control of your financial future by learning to spot patterns like the inverse head and shoulders. Start exploring the world of technical analysis and chart patterns today, and make your money work harder for you. If you’re uncomfortable doing the calculations manually, there is a inverted head and shoulder pattern solution. I suggest using other technical analysis tools, such as Fibonacci retracement levels, support and resistance levels, or other chart patterns, to validate or adjust the price targets.

Method #1: After the Breakout

This point is known as the “head” and is often the result of the selling pressure intensifying momentarily. This part of the pattern is characterized by a price decline followed by a bottom, leading to a subsequent rally. This forms the first trough, often reflecting a period of selling pressure. However, real-life patterns are not always perfect, so it is up to the trader to gather information from tools and charts to help make a smart trade. To draw the neckline, simply draw a line connecting the highs that led to the shoulder lows. Necklines aren’t always straight lines and can look more like slanted trendiness, so be aware of exactly where the breakout of the neckline would occur so you don’t join the trade late.

Now let’s discuss the difference between inverse head and shoulders bullish or bearish. 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. Strike, founded in 2023, is an Indian stock market analytical tool.

The inverse head and shoulders pattern also offers traders predictive power regarding future price movements. The difference in price between the head and the neckline often provides a target for the subsequent bullish move after the pattern is completed. When an inverse head and shoulders pattern breaks out, you can estimate the price target using this method. However, it’s important to remember that the price may only sometimes reach the exact target.