Inverse Head and Shoulders: The Definitive Guide

The formation of the second shoulder suggests the market may be bottoming. This right shoulder bottoms around the same price level as the left shoulder did previously. Now that you know what the inverse head and shoulders is, let’s look at how to properly identify it and the key components to analyze. If you want to capitalize on this high-probability reversal setup, you’ll need to understand the inverse head and shoulders pattern inside and out. So the market is likely to face selling pressure from profit taking (from buyers) — and traders who want to sell at Resistance. Because how the “right shoulder” forms is a key criterion to whether you want to trade the breakout, or not.

Components of an Inverse Head and Shoulders Pattern

The components of an inverse head and shoulders pattern in technical analysis are three troughs and peaks. The first and third troughs are smaller, forming the shoulders, while the second trough is the deepest, forming the head of the pattern. The troughs are connected by downward-sloping trend lines, forming the neckline, which is an important part of the pattern.

Since this approach is anticipatory in nature, it has a probability that the price would break the low of the Right Shoulder as well as the Head. However, if the pullback turns into a breakout, you can definitely go to open a long trade. When you see something like this, it would be better not to trade such patterns. If the breakout is occurring with relatively low volume then you should proceed with caution. The few pin bars on the chart above the neckline indicate a weak breakout. The best way to time your entry (a perfect entry) is to use a smaller time frame, like 5-Minute.

This increase in volume during the breakout above the neckline is a strong validation of the pattern, suggesting that the bullish reversal is supported by buyer commitment. The price moves downward, and it hits a low point called a trough. Market resistance pushes it back down, and it forms another trough. The price drops in the market to a point where the market can’t support it, which leads to the price rising again. This creates the three troughs or lows, namely the left shoulder, head, and right shoulder.

Alright, if you’ve been following along with focus and dedication (which I know you have!), you can probably guess what’s coming in this section. The Inverted Head and Shoulders pattern fails in the same way—but in reverse. If a pattern fails, it usually ends up having the opposite effect on price compared to its valid counterpart. However, waiting for a retest that never happens can lead you to miss good trades on occasion.

• Ideally, volume should diminish as each trough is formed and then significantly increase as the price breaks above the neckline.
• This right shoulder bottoms around the same price level as the left shoulder did previously.
• The low should be higher than the head, usually in line with the left shoulder’s low.
• It is essential to use additional indicators and analysis to increase the probability of success.
• Once the last trough is made, the price action moves upward, toward the resistance level and breaks through.
• If you know how to identify this pattern on a chart and calculate its particular target, you’ll be better equipped for your trading journey.

Trading a Valid Head and Shoulders

• This helps to manage risk if the price reverses back into the bearish trend after the breakout.
• In early August, USD/CAD closed decisively above the neckline to complete the pattern.
• Another way is to measure the distance from the tip of the head of the pattern to the neckline.
• The inverse head and shoulders pattern is a technical indicator that signals a potential reversal from a downward trend to an upward trend.
• For the right shoulder, volume is usually lower compared to the head, signaling that selling pressure is diminishing.
• After a head and shoulders pattern, which is a bearish formation, a downtrend typically follows.

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There is no specific time frame for trading an inverse head and shoulders pattern. The trader can choose the time frame depending on his preference. There are  timeframes, like intraday charts, daily charts, weekly charts, and monthly charts which are used depending on the trading style of the trader. The trader can use any time frame to trade an inverse head and shoulders pattern. The pattern in technical analysis indicates a potential change in the asset or security direction, signalling a positive outlook for future price movements. Traders and investors consider this price pattern in technical analysis as a bullish reversal signal.

How to Identify an Inverse Head and Shoulders Pattern?

Now that we’ve broken down what an inverse head and shoulders pattern looks like, let’s see some real examples of how this formation takes shape. Observing actual price action and how this pattern develops is crucial. Choosing when to enter the trade after the neckline breakout is always left to your best judgement.

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The left shoulder is the point where the price falls and slowly starts to rise. The head is the point where the price falls again to a point lower than the left shoulder as shown in the image.The price  slowly starts to rise again after this fall. The right shoulder is the inverted head and shoulder pattern point where the price falls again, but not as low as the head. The inverse head and shoulder finds strong support after the market makes a lower low, which forms the head of the pattern. The market finds resistance at the neckline once more, which leads to the formation of the second shoulder.

By identifying a left shoulder, head and right shoulder, volume will help to confirm the completion of the pattern by breaking above the neckline. When that pattern does form and the volume leading to the breakout is significant, traders can often ride the uptrend for relatively large price movements, which create large profits. One of the most reliable reversal trends traders use in a downtrend is the inverse head and shoulders pattern.

Can Inverse Head and Shoulders Patterns forecast market trends?

As the pattern progresses, a volume spike at the head—a result of panic selling—often precedes a rally where increased buying activity starts to manifest. This rally is not only about price but volume as well, as the latter supports the legitimacy of the reversal. An Inverse Head and Shoulder Pattern is a reversal chart pattern that is seen when a security’s price falls.

How to trade an inverse head and shoulder pattern?

The inverse head and shoulder pattern is a popular tool among traders and is used in technical analysis to predict price trends in financial markets. Traders use it to identify potential reversals in downtrends and to determine market entry and exit points. The head and shoulder bottom, or reverse head and shoulders, occurs after a downtrend and signals a potential reversal to the upside. The inverse head and shoulder pattern is considered a bullish reversal pattern. In essence, the inverse head and shoulders pattern is a bottoming chart pattern – meaning, sellers fail in pushing prices lower below a certain support level. The first and third troughs are considered inverted shoulders, while the second is regarded as the inverted head.

This approach allows traders to open a trade early in a new trend. However, it’s risky because of the possibility of a fakeout and increased slippage. By analyzing the price chart and identifying these essential elements, traders can successfully spot an inverted head and shoulders pattern. Just as the Head and Shoulders pattern is a widely recognized bearish signal, the Inverted Head and Shoulders is equally famous as a bullish one. As traders spot this formation, it becomes a self-fulfilling prophecy in the opposite direction.

The early identification of this pattern as a reliable precursor to a bullish market reversal is pivotal. Following a downturn, a decisive neckline breakout must occur to confirm that control has moved from sellers to buyers. It’s this shift accompanied by a price rally through the neckline that underscores the bullish momentum facing the market ahead.

However, if the pattern completes and breaks up, scalpers on both sides can take advantage of the quick moves up while the pattern fluctuates before confirming a trend that will continue. They share many characteristics of their counterpart, such as the head and shoulders pattern. To effectively use the inverse head and shoulders pattern for trading, patience is key.

These 6 methods provide the traders with necessary information to identify the pattern and set targets. The weakness of an inverse head and shoulder pattern help with improving the trading strategy. These are the major features used to identify the inverse head and shoulder pattern.