Inverse Head and Shoulder Pattern 101: A Comprehensive Guide

What is an Inverse Head and Shoulder Pattern?

An inverse head and shoulder pattern is a bullish reversal pattern that forms when the price of an asset makes three consecutive lows, with the middle low being the lowest (the "head") and the two outside lows being higher (the "shoulders"). The neckline is a horizontal line drawn across the tops of the left and right shoulders.

How to Identify an Inverse Head and Shoulder Pattern

1. Identify the three lows. The middle low should be the lowest of the three, and the two outside lows should be higher.
2. Draw the neckline. Draw a horizontal line across the tops of the left and right shoulders.
3. Confirm the breakout. The price must break above the neckline to confirm the reversal pattern.

Example of an Inverse Head and Shoulder Pattern

The following chart shows an example of an inverse head and shoulder pattern.

[Image of an inverse head and shoulder pattern]

Psychology Behind the Inverse Head and Shoulder Pattern

The inverse head and shoulder pattern is a bullish reversal pattern because it indicates that buyers are gaining control of the market. The pattern forms after a period of selling pressure, and it shows that buyers are stepping in to support the price. The breakout above the neckline confirms the reversal, and it indicates that buyers are now in control.

How to Trade the Inverse Head and Shoulder Pattern

There are a few different ways to trade the inverse head and shoulder pattern. One common approach is to buy when the price breaks above the neckline. Another approach is to wait for a pullback to the neckline after the breakout and then buy when the price bounces off the neckline.

Pros and Cons of Trading the Inverse Head and Shoulder Pattern

Pros:

• The inverse head and shoulder pattern is a relatively easy to identify pattern.
• It is a bullish reversal pattern, which means that it has the potential to generate profits.
• It can be traded in a variety of markets, including stocks, commodities, and currencies.

Cons:

• The inverse head and shoulder pattern is not always a reliable indicator of a price reversal.
• It can take a long time for the pattern to develop.
• It can be difficult to determine the exact entry and exit points for the trade.

Common Mistakes to Avoid

• Trading too early. Do not buy before the price breaks above the neckline.
• Trading too late. If you wait too long to buy, you may miss out on the majority of the move.
• Overtrading. Do not trade more than you can afford to lose.
• Getting stopped out. Place your stop-loss orders carefully to avoid getting stopped out of the trade prematurely.

Conclusion

The inverse head and shoulder pattern is a bullish reversal pattern that can be used to identify potential trading opportunities. It is important to remember that the pattern is not always reliable, and it is important to trade with a sound trading plan.