Inverse Head and Shoulders is a strong reversal price pattern. Investors are always interested in this price pattern every time it appears. So what is the Inverse Head and Shoulders pattern? How to identify? Today, I will share it with you.
What is Inverse Head and Shoulders? Identification characteristics
Inverse Head and Shoulders is a bullish reversal price pattern. The shape of this pattern is the same as that of the Head and Shoulders pattern but in the opposite direction. It is usually at the bottom of the market and is a signal of strong bullish momentum.
The pattern consists of Left Shoulder, Head, and Right Shoulder. A neckline is a line connecting the two peaks of the pattern. The pattern is perfect when the neckline is horizontal (Two peaks have equal prices).
Usually, this pattern comes after a strong price drop. This is a warning signal for investors that the market will be back to an uptrend if the price breaks out of the neckline and goes up.
After creating the Right shoulder, the price will break out of the neckline to go up and create an uptrend. In some cases, the price can retest the neckline and then increase again.
If you don’t know what retest is, please review this article: What is Retest?
Popular Inverse Head and Shoulders types
In fact, the pattern does not always appear with a perfectly horizontal neckline. Based on the neckline, there are two more types of patterns: Inverse Head and Shoulders with an upward neckline or a downward neckline. Please look at the image below to see these two types more clearly.
The variant of Inverse Head and Shoulders pattern with an upward neckline
This is a more common pattern with the neckline being a straight line upwards.
A practical example of a variant of the pattern with an upward neckline.
The variant of Inverse Head and Shoulders pattern with a downward neckline
The same goes for when the neckline is downwards. We have the variant pattern with a downward neckline.
A practical example:
Characteristics of the Inverse Head and Shoulders pattern
Some of the characteristics that increase the effectiveness of the Inverse Head and Shoulders pattern are as follows:
+ The stronger the price decreases before the pattern, the stronger the price increases after it.
+ This pattern becomes most effective if there are downward slopes (sudden drop in prices).
+ This pattern becomes most effective if there are upward slopes (sudden increase in prices).
+ The accuracy of this pattern increases when the right shoulder is lower than the left shoulder.
How to trade Forex and binary options with the Inverse Head and Shoulders pattern
The Inverse Head and Shoulders pattern can be used as a trading signal or as a signal to capture the upcoming uptrend. I will guide you to use this efficient pattern in both Forex and binary options trading. Stay tuned!
How to trade Forex
I will guide you in detail on how to open orders, stop-loss, and take-profit to maximize profits when trading with this pattern. This is a very good signal for you to open UP orders and make profits in an uptrend market.
When the pattern appears, open an order like this:
+ Entry Point: Right after the candlestick breaks out of the neckline.
+ Stop-Loss: At the trough of the right shoulder.
+ Take-Profit: When the price reaches a sufficient increase by the distance from the head to the neckline of the Inverse Head and Shoulders pattern.
How to trade binary options
In addition to the break-out point from the neckline, another effective entry point is when the price retests the neckline and bounces up. This is a very suitable entry point when you trade binary options.
Requirements: A long expiration time (If you use the 5-minute Japanese candlestick chart to analyze the market, the expiration time for a binary options order should be between 30 and 45 minutes.)
How to open an order.
+ Open an UP order when the price retests the neckline of the Inverse Head and Shoulders pattern.
The Inverse Head and Shoulder pattern is one of the very popular Forex trading strategies. In addition to the above trading strategy, you can combine it with other indicators to increase trading accuracy.
Get familiar with this price pattern today on a Demo account. If you do not have a demo account yet, register for an Olymp Trade account immediately by clicking on the box below. This is a very suitable trading platform to test the Inverse Head and Shoulders pattern when there are both binary options and Forex trading types. Finally, goodbye and see you again.