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Inverse head and shoulders pattern

The inverse head and shoulders pattern (also known as a reverse head and shoulders or head and shoulders bottom), is the opposite of the standard version as it occurs after a downtrend and signals a potential reversal to the upside. This lesson shows you how to identify the inverse pattern and introduces two ways you can use it to look for possible buying opportunities.

Identifying the inverse head and shoulders pattern

Just like the standard pattern, the inverse head and shoulders consists of a left shoulder, head, a right shoulder and a neckline.

The chart below demonstrates what the pattern looks like:

  1. Left shoulder
  2. Head
  3. Right shoulder
  4. Neckline

Trading the inverse head and shoulders: method one

Once you have identified an inverse head and shoulders pattern in a downtrend and the right shoulder has been completed, you can look to enter a buy order once the price breaks through the neckline. Wait for a candle to close above the neckline before entering the market to avoid a false breakout.

The chart below shows where the buy order should be placed:

  1. Left shoulder
  2. Head
  3. Right shoulder
  4. Neckline
  1. Long entry when the candle closes above the neckline.

The stop loss can be placed below the right shoulder:

  1. Left shoulder
  2. Head
  3. Right shoulder
  4. Neckline
  1. Long entry
  2. Stop loss below the right shoulder

The take profit level is calculated by measuring the distance between the head and the neckline of the pattern, and then placing the target the same distance from the neckline in the direction of the breakout.

  1. Left shoulder
  2. Head
  3. Right shoulder
  4. Neckline
  5. Distance from neckline to the head
  6. Same distance as the neckline to the head
  1. Long entry
  2. Stop loss
  3. Take profit – same distance away from the neckline, as the neckline to the head

Trading the inverse head and shoulders: method two

The second way to trade an inverse head and shoulders pattern is to wait for the price to trade above the neckline (broken resistance) and then look to place a buy order on the retest of the neckline (broken resistance now becomes support).

  1. Left shoulder
  2. Head
  3. Right shoulder
  4. Neckline
  5. Price breaks through the neckline and retests the neckline as support
  1. Long entry as the price find support at the neckline

The stop loss would go below the new support area:

  1. Left shoulder
  2. Head
  3. Right shoulder
  4. Neckline
  5. Price tests the neckline as support
  1. Long entry
  2. Stop loss goes below the right shoulder.

The profit target goes the same distance away from the neckline, as the height between the head and the neckline:

  1. Left shoulder
  2. Head
  3. Right shoulder
  4. Neckline
  5. Distance between neckline and the head
  6. Same distance form the neckline to the head
  1. Long entry
  2. Stop loss
  3. Take profit is the same distance away form the neckline as the distance between the head and the neckline

Summary

So far you have learned that:

  • the inverse, or reverse head and shoulders is a reversal pattern that occurs after a downtrend and indicates possible buying opportunities.
  • You enter when the price breaks through the neckline after the right shoulder has completed and the candle has closed above the neckline. The stop loss would go below the right shoulder and the profit target would go the same distance away from the neckline, as the neckline to the head.
  • the second way that you can enter, is to wait until the price breaks through the neckline and then comes back down to retest the neckline as support. The stop loss would go below the new support level and the profit target goes the same distance away from the neckline, as the neckline to the head.