The Inverted Head And Shoulders pattern, and how to use it
The inverted head and shoulders pattern is a bullish chart pattern that is formed by a trough, followed by a lower trough, and then a final higher trough. The pattern gets its name because it looks like an inverted head with two inverted shoulders on either side. This pattern is created when the price of an asset falls to a support level, rises back up, and then falls again to a lower support level before eventually rising. The inverted head and shoulders pattern is a reversal pattern, which means that it is typically seen as a bullish sign and indicates that the asset’s price is likely to reverse its downward trend and start rising.
To form an inverted head and shoulders pattern, the asset’s price will typically fall to a support level, rise back up, and then fall again to a lower support level before eventually breaking through the resistance level and rising. The pattern is typically completed when the price breaks through the neckline, which is a trendline that connects the highs between the left shoulder, head, and right shoulder.
One of the key characteristics of the inverted head and shoulders pattern is that the trading volume tends to increase as the pattern progresses. This is because the price is making a significant move and there is more activity from traders. However, once the price does break through the neckline, trading volume may decrease as the price starts to rise and traders become less active.
In order to trade the inverted head and shoulders pattern, traders should look for the following characteristics:
- A trough, followed by a lower trough, and then a final higher trough: This is the key feature of the inverted head and shoulders pattern, as the asset’s price falls to a support level, rises back up, and then falls again to a lower support level before eventually rising.
- A neckline: This is a trendline that connects the highs between the left shoulder, head, and right shoulder.
- Increasing trading volume: As the pattern progresses and the price approaches the neckline, trading volume should increase.
- A breakout: Once the price breaks through the neckline, traders should enter into long positions and expect the price to continue rising.
It is important to note that the inverted head and shoulders pattern is a bullish pattern, but it is not a guarantee that the asset’s price will rise. As with any trading strategy, it is important to use risk management techniques and to always be aware of the potential for losses.
One way to trade the inverted head and shoulders pattern is to set a buy order just above the neckline, as this is where the price is likely to break through and start rising. Traders can also set a stop loss order just below the right shoulder trough, in case the price does not break through the neckline and instead falls back down.
Another way to trade the inverted head and shoulders pattern is to wait for confirmation that the price has indeed broken through the neckline before entering into a long position. This can be done by looking for additional bullish signals, such as a bullish crossover on a moving average or a bullish candlestick pattern.
It is important to keep in mind that the inverted head and shoulders pattern can take some time to form, as the price needs to fall to the support level, rise back up, and then fall again to the lower support level before breaking through the neckline and rising. Traders should be patient and wait for the pattern to complete before entering into a trade.
