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The Inverse Head and Shoulder Pattern, which is also called a Head-and-Shoulder Bottom or an Upside Down Head-and-Shoulder Pattern, is a great bullish reversal pattern and one of my favorite...

What is an inverse head and shoulders pattern: How does it work?

What is an inverse head and shoulders pattern: How does it work?

The Inverse Head and Shoulder Pattern, which is also called a Head-and-Shoulder Bottom or an Upside Down Head-and-Shoulder Pattern, is a great bullish reversal pattern and one of my favorite patterns to trade.
 

The stock market is a good example of a market with a fixed supply and a long natural bias.


This pattern is a strong one for the permeable in that market. In a nutshell, this pattern is the same as the usual head-and-shoulders pattern.

This article will talk about how to find the inverse head and shoulders pattern, how it is built, how to know if it is real, and how to trade this very bullish pattern.
 

What's the Inverse Head and Shoulders?
 

An inverse head and shoulders pattern, also called a "head and shoulders bottom," is similar to the standard head and shoulders pattern, but the top of the head and shoulders is used to predict reversals in downtrends.
 

This pattern is seen when the price of a security falls to a trough and then rises, falls below the previous trough, then rises again, and then falls again but not as far as the second trough.


Once the last trough is made, the price goes up until it hits resistance at the top of the last trough.

Recognizing the Head and Shoulders Pattern in inverse


The following are the three constituent pieces that make up an inverse head and shoulders pattern:
 

  • The price experiences extended downward trends, reaches a trough, and then begins to climb again, eventually reaching a peak.
     
  • The price drops once again to establish a second trough that is far lower than the previous low, and then it begins to climb once more.
     
  • The price drops for the third time, but this time it only goes down to the level of the initial trough. After this, it begins to rise once more, reversing the pattern.


How to  Trade in the Inverse Head and Shoulders Pattern?


A reversal in the uptrend is indicated when the head and shoulders pattern forms a trendline. Similarly, the appearance of an inverse head and shoulders pattern during a downward trend is suggestive of a change from bearish to bullish sentiment.


In the same way that the head and shoulders pattern appears in all time frames, the inverse head and shoulders pattern is likewise simple to identify.
 

The formation of an inverse head and shoulders pattern occurs when the price of an asset first falls to a trough, then rises, and then falls for the second time, but the fall this time is steeper than the fall that occurred the first time.


The price goes up once more before going down for the very last time.

Analyzing Trading Tips
 

Only trade the inverse head and shoulder pattern in a bull market.


Before trading with this pattern, it's important to know what the overall trend is. Whether you use the 200-day moving average or the true strength index to find the trend, make sure that the overall trend is bullish.
 

Buy the inverse head and shoulder pattern when prices are close to their yearly highs.


If you don't trade long-biased markets like stocks, this may seem counterintuitive, but new all-time highs and yearly highs usually become the new main support levels.


When the inverse head and shoulders pattern shows up close to major highs, it could be a good time to get in early.
 

Tall and narrow patterns do better than short and wide patterns.
 

I try to avoid inverse head and shoulder patterns with wide shoulders. They don't have much room to go up, and when they do, it's not by much.
 

Patterns where the volume of the right shoulder goes down work better than patterns where the volume of the right shoulder stays the same or goes up.
 

If there is one thing that will make the inverse head and shoulders pattern less profitable or even not work at all, it is volume.


The most important things about the volume are the drop in volume on the right shoulder and the rise in the breakout above the neckline.

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If you think back to Oracle's 15-minute chart, look at the volume on the breakout above the neckline. It is almost 5 times the 20-period average.
 

Patterns with a higher left shoulder are more likely to be correct. This is because the low point of the left shoulder is higher than the low points of the head and right shoulder.
 

I'm going to go ahead and suggest that you ignore a head and shoulder pattern in which the right shoulder is lower than the left.


Often, the rise on the left shoulder is so steep that many indicators put the breakout in very overbought territory.
 

When the left shoulder is below the right shoulder, price action is good and shows the start of a Bollinger Squeeze or that the market is oversold.


I don't worry about shoulder heights in futures or forex markets. I only worry about them in stocks.
 

What Makes an Inverse Head and Shoulders Different from a Head and Shoulders?


The standard head and shoulders chart, which is used to predict reversals in up-trends, is the opposite of an inverse head and shoulders chart.
 

This pattern is seen when the price of a security rises to a peak and then falls, rises above the peak and then falls again, and then rises again but not as far as the second peak.
 

As soon as the last peak is reached, the price goes down and meets resistance near the bottom of the last peak.
 

Limitations of an inverse Head and Shoulders


The ups and downs of the head and shoulders pattern, like all charting patterns, tell a very specific story about the battle between bulls and bears.
 

The first drop and peak show that the previous bearish trend was gaining speed as it moved into the first shoulder part.


Bears try to keep the price going down as long as possible, so they try to push it past the initial trough after the shoulder to a new low (the head). At this point, it is still possible for bears to take back control of the market and keep going down.
 

But when the price goes up a second time and goes above the first peak, it's clear that the bulls are getting stronger. Bears try again to push the price down, but all they can do is get it to the same level as the first trough.


This failure to beat the lowest low shows that the bears have lost, so the bulls take over and drive the price up, completing the reversal.
 

Conclusion 


Inverse head and shoulders are a trend reversal pattern that has been proven to work. When the asset goes up to where the right shoulder breaks the neckline, the pattern is made.
 

Since bulls have taken control of the market and set up an uptrend, traders take a long position.
 

It is a clear pattern that lets traders plan an entry just above the neckline of the formation and put a stop-loss below the right shoulder. But you have to be quick enough to notice the pattern in order to take a stand.
 

Even though a price drop during an uptrend is common and gives traders a second chance to buy, it is not a given.
 

Read More From ForexIntels:


How The Head And Shoulders Pattern Looks Like -ForexIntels


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