Inverse Head and Shoulders Pattern
Learn to recognize and trade an inverse head and shoulders pattern through interactive charts.
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What is an inverse head and shoulders pattern?
An inverse head and shoulders pattern is a bullish reversal pattern, which marks the end of a downtrend and the start of an uptrend.
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Inverse head and shoulders duration
This pattern can occur over various time frames.
Inverse head and shoulders characteristics
This pattern contains three successive peaks. The lowest peak is called the head. The two outside peaks are called left and right shoulders.
- This pattern requires a strong prior downtrend.
- Left shoulder: the price forms a new low, before rising back towards its long term trendline. This completes the formation of the left shoulder.
- Head: the price resumes its downtrend and makes a lower low that defines the head. The price then rises again back towards its most recent high. In doing so, it’s important that this new local high breaks the prior downtrend. The line connecting both local highs is called the neckline.
- Right shoulder: however, the neckline also acts as resistance for now, and causes the price to resume its downtrend. But on this occasion, the price finds support earlier, around the same level as the left shoulder. With buyers now outweighing sellers, the price resumes its advance. This completes the formation of the right shoulder.
- Neckline: the neckline can be horizontal, downward sloping or upward sloping. An inverse head and shoulders pattern is always bullish, but one with a rising slope is even more positive.
Note: complex patterns can emerge, with more than 2 shoulders.
Volumes are an important way to validate the strength of this pattern. They should rise in the second half of the pattern, as prices rise. A rise in price supported by stronger trading volumes points to a change in sentiment. This lays the ground for a future uptrend.
Inverse head and shoulders trading tips
A convincing close above the neckline completes the Inverse Head and Shoulders pattern. The breakout should happen on stronger relative volume, at least 40% higher than average. Some traders wait for a successful retest of the neckline before opening a long position. This means waiting for the neckline to act as a support rather than resistance. You may want to wait for several daily closes above the neckline, rather than acting on the first.
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