HomeAI Signal Cloud BacktestingTradeGPT
Back

What Is the Inverse Head and Shoulders Pattern?

Nov 23, 2023 |

Chart Patterns

The Inverse Head and Shoulders chart pattern, found in technical analysis, serves as a potential signal for a reversal of a downtrend. It is the inverse of the Head and Shoulders pattern, with three troughs, the central one being the lowest (referred to as the "head"), and the other two forming the "shoulders". The pattern is deemed complete when the price breaches the neckline, which is drawn through the peaks of the pattern. Typically, this breakout indicates a reversal in the prevailing downtrend, often prompting traders to perceive it as a buying opportunity. The Inverse Head and Shoulders pattern is considered reliable by many traders, yet, like all technical analyses, it is recommended to utilize it in conjunction with other indicators to confirm a potential trend reversal.

The Difference Between an Inverse Head and Shoulders and a Head and Shoulders


The primary distinction between an inverse head and shoulders pattern and a standard head and shoulders pattern lies in their directional bias. A standard head and shoulders pattern is a bearish reversal signal indicating a potential shift from a bullish to a bearish trend and is defined by a central peak (the head) flanked by two smaller peaks (the shoulders). On the contrary, an inverse head and shoulders pattern is a bullish reversal signal hinting at a potential transition from a bearish to a bullish trend, and is characterized by a central trough (the head) between two smaller troughs (the shoulders). Essentially, the inverse head and shoulders pattern serves as the mirrored counterpart of the standard head and shoulders pattern.


How to trade an Inverse Head and Shoulders Pattern


Executing a trade based on an inverse head and shoulders pattern involves identifying the pattern, waiting for confirmation, and taking a long position. Confirmation occurs when the price surpasses the neckline, connecting the two high points between the shoulders and the head. Subsequently, traders can enter a long position, placing a stop loss below the neckline.


To determine the profit target, measure the distance between the head and the neckline, and add that distance to the breakout level. This target represents the projected upward move after confirming the pattern.


It is essential to consider that the inverse head and shoulders pattern works most effectively in markets trending upwards. In a downtrend, it is preferable to await the formation of a traditional head and shoulders pattern, signaling a potential reversal to the downside.


Importance Of Incorporating The Inverse Head And Shoulders Pattern Into Your Trading Strategy


The primary distinction between an inverse head and shoulders pattern and a standard head and shoulders pattern lies in their directional bias. A standard head and shoulders pattern is a bearish reversal signal indicating a potential shift from a bullish to a bearish trend and is defined by a central peak (the head) flanked by two smaller peaks (the shoulders). On the contrary, an inverse head and shoulders pattern is a bullish reversal signal hinting at a potential transition from a bearish to a bullish trend, and is characterized by a central trough (the head) between two smaller troughs (the shoulders). Essentially, the inverse head and shoulders pattern serves as the mirrored counterpart of the standard head and shoulders pattern.


The Bottom Line


In summary, the Inverse Head and Shoulders pattern serves as a valuable tool for identifying potential trend reversals and offering trading opportunities. Traders should grasp the distinctions between the Inverse Head and Shoulders and the Head and Shoulders patterns, and trade them accordingly. When integrating the Inverse Head and Shoulders pattern into their trading approach, traders should supplement it with other technical analysis tools and fundamental analysis to validate potential trend reversals. This approach can enhance the likelihood of profitable trades while mitigating risks.