What Does The Inverse Head And Shoulders Trading Pattern Mean?

The traditional head and shoulders pattern, often referred to as a "head and shoulders top," is used to predict reversals in uptrends; an inverse head and shoulders pattern, also known as a "head and shoulders bottom," is the opposite.

When a security's price movement displays the following traits, it is said to be following this pattern: falling to a trough, rising, falling below the previous trough, and lastly falling but not reaching the second trough.

The price moves upward toward the resistance located near the top of the previous troughs as soon as the final dip forms.

Inverse head and shoulders: What Do They Mean?

Investors typically start a long position when the price breaks through the resistance of the neckline. The shoulders are the first and third troughs, and the head is the second apex.

A rise above the neckline-style resistance level is seen as a hint of a quick upward advance.

Many traders are waiting for the volume to spike enough to confirm the breakout. This pattern, which forecasts alterations in a downward trend, is the inverse of the well-known head and shoulders pattern.

By calculating the distance between the pattern's neckline and bottom of the head and using that measurement to project how far the price may move in the breakout direction, a reasonable profit target can be determined.

The profit target is positioned ten points above the pattern's neckline, for instance, if the distance between the head and neckline is 10 points.

It is possible to aggressively set a stop-loss order below the breakout price bar or candle. An alternative would be to put a cautious stop-loss order below the right shoulder of the inverse head and shoulders pattern.

The three components of an inverse head-and-shoulders pattern are as follows:

The price falls to a trough after extended bearish patterns, then rises to a peak.

The price drops to a second trough that is well below the prior low before rising once more.

The price drops a third time, but only to the initial trough level, before rebounding and turning the trend around.

An inverse head and shoulders contrasts with a head and shoulders.

A traditional head and shoulders chart, which predicts uptrend reversals, is the opposite of an inverted head and shoulders chart.

This pattern appears when the price of a security increases to its top, declines, and then rises once more—but not as high as the second peak. After the last high, the price keeps dropping toward the resistance of earlier peaks.

Inverse Head and Shoulders disadvantages

The head and shoulders pattern's ups and downs, like those of other charting patterns, tell a very specific tale about the struggle between bulls and bears.

The initial decline and subsequent peak demonstrate how the momentum of the prior negative trend evolved into the initial shoulder segment.

Bears seek to drive the price below the initial trough following the shoulder to a new low in an effort to extend the bearish trend as long as feasible (the head).

At this point, it is still possible for bears to retake control of the market and maintain the downward trend.

But unless the price rises a second time and reaches the previous top, it won't be obvious that bulls are winning.

Bears attempt to drive the stock down once more, but are only able to reach the lower low set during the initial fall.

After the bears fail to surpass the lowest low, the bulls seize control and push the price higher to complete the turnaround.