HOW DO YOU TRADE INVERSE HEAD AND SHOULDER PATTERNS?

A DEFINITION OF THE INVERTED HEAD AND SHOULDERS

Original Source:? A head and shoulders pattern that has been inverted often referred to as a "head and shoulders bottom," is comparable to a standard head and shoulders pattern in the sense that the head and shoulders top is used to anticipate reversals in the direction of a downward trend.

This pattern is identified when the price movement of an asset demonstrates the following characteristics: price declines to a trough and then rises; price declines below the previous trough and then rises again, and price declines once more but does not go as far as the second trough.

After making the previous drop, the price continues to go higher in the direction of the resistance that is located near the top of the previous troughs.

KEY POINT

• Inverted versions of the head and shoulders pattern are known as inverse head and shoulders patterns.
• It can be applied to forecast downtrend reversals.
• A bull market is predicted when an inverse head and shoulders pattern is complete.
• Typically, investors take a long position when the price crosses over the neckline's resistance.

WHAT DO THE INVERSE HEAD AND SHOULDERS LOOK LIKE?

The following three elements make up an inverse head and shoulders pattern:

• The price drops to a trough after protracted bearish trends, then recovers to form a peak.
• The price increases once again before falling once more to create a second trough that is well below the previous low.
• The third decrease in price only brings it to.

HOW TO TRADE THE INVERSE HEAD AND SHOULDERS PATTERN?

The exciting part is now upon us: learning how to trade (and profit) from this pattern. But first, let's review the material we've already studied.

You have now become familiar with the inverse head and shoulders five distinguishing features. You are aware of how to spot a pattern and how to tell whether a pattern has been verified.

Let me now draw your attention to how you can truly profit from this pattern. Regarding trading the inverse head and shoulders, there are two schools of thinking.

Using a buy-stop order right above the neckline is advised at first. Catching the market as it overcomes neckline resistance is the goal here.

This method has the drawback of making it more likely for you to suffer a false break. You can avoid waiting for the market to close above resistance by placing a buy-stop order above the neckline.

This proximity is crucial since it establishes the pattern. The pattern cannot be traded if it is absent.

If you don't wait until the close, the market may jump above the neckline, trigger your buy order, fall back below the neckline, and never close above it again. You are now in a losing position right away.

The second school of thought is the one I subscribe to and advocate. This increases the likelihood that the breakout will be supported by the market and decreases the possibility of a false break.

Using this strategy, you have two choices for how and where to enter the market. Both entry strategies are displayed in the chart below.

As soon as the 4-hour candle closes, the first option in the chart above shows what would be a market buy order. Why four hours?

Remember that it all depends on what period respects our fundamental level. The 4-hour chart is used in this instance.

A pending purchase order is displayed in the second and preferred entry strategy on a retest of the broken neckline as new support.

Old resistance can turn into new support and vice versa, as stated in "trading 101," which is exactly what occurred in the AUDUSD chart above.

AGGRESSIVELY TRADING AN INVERSE HEAD AND SHOULDERS

A buy-stop order can be put just above the inverse head and shoulders pattern's neckline. This guarantees that the investor enters the neckline's initial break and gains upward momentum.

The likelihood of a false breakout and increased slippage regarding order execution are drawbacks of this strategy.

CONSERVATIVELY TRADING AN INVERSE HEAD AND SHOULDERS

The breakout's validity can be confirmed by waiting for the price to close above the neckline, which is what an investor can do.

An investor can enter using this strategy on the first closing above the neckline. Alternatively, a limit order can be set up at or slightly below the broken neckline to profit from a price retracement.

A little less slippage is likely to occur if you wait for a pullback, but you risk missing the trade if one doesn't happen.

CONCLUSION

This lesson covered a lot. To conclude, let's review the most crucial inverse head and shoulders pattern trading tips.

First, it is a reversal pattern. It usually follows a market decline. It indicates a market where buyers may outnumber sellers, raising prices.

The pattern is verified when the market closes over neckline resistance. The neckline determines the close period. The AUDUSD 4-hour chart respected the level and showed the pattern most accurately.

Thus, a 4-hour close above the neckline confirmed the pattern. Measuring objectives might help set a profit target.

Measuring the head-to-neckline distance in pips yields the target. You then project the neckline distance to a higher market point. The calculated move, on the other hand, is the neckline-to-objective distance.

There are multiple approaches to determining a target for profits, one of which is to use a measurable objective. Never make use of it by itself.

The most effective methods for locating a profit target for an inverse head and shoulders pattern include having a measurable goal as well as important support and resistance levels.