The Inverse Head and Shoulders Pattern is one of the most popular and widely recognized chart patterns used in technical analysis. The Inverse Head and Shoulders Pattern is the exact opposite of the traditional Head and Shoulders Pattern, with the trend reversing from a downtrend to an uptrend. This Pattern is characterized by three troughs or valleys where two troughs on the sides are shorter than the one in the middle, forming a “head and shoulders” shape. It is important to note that the Inverse Head and Shoulders Pattern is not the exact opposite of the Head and Shoulders Pattern but rather a slight variation.
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What is an Inverse Head and Shoulders Pattern
The Inverse Head and Shoulders Pattern is a chart pattern used to identify potential trend reversals. The Pattern consists of three successive troughs and peaks, with the middle peak being the longest of all. This Pattern signals that price of a stock or financial asset is likely to break out of the previous downtrend and move into an uptrend.
The Inverse Head and Shoulders Pattern is a chart pattern that is made up of two troughs and two peaks. The two troughs represent the shoulders, and the peak in the middle is the head. The shoulders are usually of equal heights, and the peak in the middle is the longest of all. This Pattern indicates that the stock or financial asset is likely to reverse its previous trend and move into an upswing.
Identifying the Inverse Head and Shoulders
An inverse head and shoulders pattern is formed when the price action fulfills these three criteria.
1. After a downtrend, the price drops to a trough and retraces back up to form a peak.
2. The price then drops again to create a second trough that is significantly lower than the previous low. and rises once more.
3. The price falls again the third time till the point of the first through and rises again to reverse the trend.
How to Trade with Inverse Head and Shoulder Patterns?
While trading with an Inverse head and shoulders pattern, Traders should Always look to take up a long position when the price breaks above the neckline. An Inverse head and Shoulder pattern is only confirmed when the price breaks and closes above the neckline, which makes it the best point to enter into an extended position.
When trading with the Inverse Head and Shoulders Pattern, it is advised to keep an eye on the volume. Above-average volume can indicate a strong reversal and is a good sign of a good entry.
Example of a trade based on inverse head and Shoulder
As shown in the picture below, the price rallies and closes above the neckline following the right Shoulder, triggering a long signal, And goes on the meet the measured target.
It is important to note that no chart pattern is perfect, and likewise, the Inverse head and Shoulder should always be used in conjunction with other tools and indicators.
Conclusion
The Inverse Head and Shoulders Pattern is a technical analysis chart pattern that traders use to identify possible trend reversals in a given stock or financial asset. This Pattern is one of the most reliable and robust reversal patterns used in the markets. It can be used to identify significant buying opportunities. This Pattern comprises two troughs and a peak in the middle. It is usually interpreted as a sign that the stock or financial asset is likely to break out of the previous downtrend and move into an uptrend.
Frequently Asked Questions
Q1: What is an Inverse Head and Shoulders Chart Pattern?
A1: An Inverse Head and Shoulders pattern is a technical Chart pattern that indicates a potential bullish reversal in a downward-trending market. It is identified by three successive troughs (lows), with the middle one being the lowest and two equal highs (shoulders) on either side of the middle-low.
Q2: What does an Inverse Head and Shoulders chart pattern tell us?
A2: An Inverse Head and Shoulders chart pattern indicate a potential reversal of the current downward trend in a security’s price. Security may be about to enter a fresh uptrend.
Q3: How do I identify an Inverse Head and Shoulders Chart Pattern?
A3: An Inverse Head and Shoulders chart pattern can be identified by looking for three successive troughs (lows), with the middle one being the lowest and two equal highs (shoulders) on either side of the middle-low.
Q4: How is the neckline used to identify an inverse head and shoulders chart pattern?
A4: A head and Shoulder are only confirmed when the price breaks above the neckline.
