Inverse Head And Shoulders Pattern

Inverse Head and Shoulders Pattern

Inverse head and shoulders pattern

Before we enter this pattern, we need to have a clear idea of head and shoulders pattern which we have discussed in the earlier lessons.

This pattern is also known as “head and shoulders bottom” or reverse head and shoulders”. It is expected after a downtrend and signals a potential reversal to the upside. We can find that it is opposite to the standard version.

shoulders pattern

We can discuss how this pattern works, the techniques adopted to look for possible “buying opportunities”.

How do we identify this pattern?

The inverse head and shoulders pattern consists of:

Left shoulder

Head

Right shoulder

Neckline

The illustration chart below will give us an idea of this pattern.

Number 1 Left shoulder

Number 2 Head

Number 3 Right shoulder

Number 4 Neckline

Practice session:

Exercise 1: Identify the inverse head and shoulders pattern. Show exercise

Exercise 2: Identify the inverse head and shoulders pattern. Show exercise

Let us now discuss the techniques involved in trading a pattern:

Technique 1:

When we identify this pattern in a downtrend and also observe that the right shoulder has been completed, we can opt to “Enter a buy order after the price breaks through the neckline.”

In order to avoid false “breakout”, before entering the market, wait for a candle to close above the neckline.

Where should the buy order be placed?

Number 1 First shoulder

Number 2 Head

Number 3 Second shoulder

Number 4 Neckline

Number 5 Distance from neckline to the head

Number 6 Same distance as the neckline to the head

(LE)-1 Long entry

(SL) -2 Stop loss

TGT Point -3 Take profit – Same distance away from the neckline, as the neckline to the head

Measure the distance between head and the neckline.

Place the target the same distance from the neckline towards the direction of the break out

Practice session:

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

Technique 2

Wait for the price to trade above the neckline (broken resistance).

Look to place a buy order on the retest of the neckline. (broken resistance now becomes support).

The profit target goes the same distance away from the neckline, as the height between the head and the neckline:

Number 1 First shoulder

Number 2 Head

Number 3 Second shoulder

Number 4 Neckline

Number 5 Distance between neckline and the head

Number 6 Same distance from the neckline to the head

(LE)1 Long entry

(SL)2 Stop loss

Target Point 3 Take profit is the same distance away from the neckline as the distance between the head and the neckline.

Practice session:

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

Nut Shell

An overview of the lesson discussed so far…

This pattern is opposite to the standard version.

This is a reversal pattern that is expected after a downtrend.

It indicates buying opportunities.

There are two techniques for trading this pattern.

We learn in Technique 1: “Enter when the price breaks through the neckline after the right shoulder has completed and the candle has closed above the neckline. The stop loss would go below the right shoulder and the profit target would go the same distance away from the neckline, as the neckline to the head.

We learn in Technique 2: Wait until the price breaks through the neckline and then comes back down to retest the neckline as support. The stop loss would go below the new support level and the profit target goes the same distance away from the neckline, as the neckline to the head.