There are many different types, shapes, and looks of charting patterns. Every pattern is very useful and gives hints about important points for changes in asset prices.
We will talk about an important pattern called "inverted head and shoulders" in this Market Investopedia blog. Look into how this pattern looks and how to understand it. Some trading communities and platforms call this pattern an inverse head and shoulders, reverse head and shoulders, or even a head and shoulders inverted.
What Does an Inverted Head and Shoulders Pattern Look Like?
An inverted head and shoulder is the opposite of how the head and shoulders of a human body look.
This is a bullish reversal pattern that happens at the end of a downtrend and signals the start of an uptrend. So, when the patterns show up on the chart, traders usually buy the asset. You might also hear it called an upside down head and shoulders pattern or an inverse head and shoulders pattern.
How to Spot Inverse Head and Shoulders
Are you having trouble finding inverted head and shoulder patterns? Well, it's not hard to find. To do this, you only need to look at the parts below:
Shape: An inverse head and shoulders has three dips. It has two shoulders and one head that is lower.
Trend: The pattern shows up during a long-term downtrend. It stops the downtrend and starts the uptrend.
Left Shoulder: The pattern begins with the left shoulder, which forms after the downtrend and is the first lower high.
Head: **The bottom part of the shoulder formation seems to be seen as **the head: It is the lowest point and is below the two shoulders.
Right Shoulder: After a big rise, the price starts to fall again and reaches the same level as the left shoulder.
Neck: A neck is a line that connects the two lows of the shoulder. It also serves as a breakout level that shows the second lower high.
Volume: The inverted head and shoulders pattern is all about volume. Most of the time, high volumes are seen as a sign that the bullish reversal is working. It can confirm that the pattern is there.
When the neckline isn't perfectly horizontal, some traders call this a slanted head and shoulders pattern.
How to Use an Upside-Down Head and Shoulders Plan
- First, find a pattern with two higher low levels on the sides and one lower low level in the middle.
- Wait for the breakout after you've found the pattern and are happy with how it looks. The pattern can only be confirmed if the price breaks above the neckline.
- A break above the neckline is seen as a sign that the price is going to go up. But traders can get a clearer picture by using technical analysis tools like Bollinger bands, moving averages, oscillators, RSI, or any other.
- Once other indicators confirm the bullish reversal, the trader can think about opening a trade.
- Put in an order to buy. Traders can set the entry price just above the breakout level, the target level equal to the height of the pattern, and the stop loss level just below the right shoulder.
Pros of the Inverted Head and Shoulder
**Simple to Find and Understand
**The pattern makes a shape that is similar to the structure of the human body. A trader doesn't need to remember the shape, and it's easy to tell what it is. It's also easy to understand the pattern once you see it. If you are an experienced trader, trading based on an inverse head and shoulders is not a big deal.
**Gives the Exact Trade Point
**There are many technical analysis patterns that can help you decide what trades to make. But when it comes to giving the exact trade levels for making trades, only a few are needed. The inverse head and shoulder is one of these. It helps traders figure out when to enter and exit a trade, where to set their stop loss, and where to take their point level.
**Helpful in Confirming
**Confirmation is always needed in technical analysis, no matter what indicator or charting pattern a trader is using. You can use an inverted head and shoulder to back up what other indicators say. Traders can use their favorite indicator with the charting pattern. It works well with volume indicators, moving averages, RSI, oscillators, Fibonacci retracement, and Bollinger Bands.
**Usefulness in a Variety of Markets
**The best part is that a trader can use the pattern to buy and sell a wide range of assets. Traders can find chances in commodity, forex, stock, indices, ETFs, CFDs, and other markets if they know what to look for. The strategy stays the same whether the head and shoulders are upside down or not.
Disadvantages of Inverted Head and Shoulder
**Using More Than One Confirmation Indicator
**The pattern is clear and has specific rules for how it should form. So, at the appearance stage, the trader needs to make sure that the head, shoulder, and neck are in the right order and level.
Also, a trader needs to wait for a breakout after the patterns show up the right way. Even after the breakout, you need to check it with other indicators to make sure it works.
**Not Being Reliable
**There is no guarantee of a bullish reversal, even if you correctly identify the pattern and confirm it. The pattern usually shows up, and the price tends to move in a certain way. But it isn't always right and can even send traders the wrong signals.
Breakouts That Aren’t Real
*Changes in market *volatility that happen without warning and trading conditions that change quickly can cause false breakouts. In these situations, the prices may go in the opposite direction, which means that traders will lose money.
**Few Chances
**As we saw above, the rules for how the pattern forms are very clear. So, it doesn't show up as often as other charting patterns. And a trader can't wait for it to happen every time they want to trade.
Conclusion
Inverted head and shoulders, also known as upside down head and shoulders, inverse head and shoulders, or head and shoulders inverted, can be a great way to find bullish opportunities in an asset. It might not work perfectly, but that's normal for all strategies.
There is no perfect strategy, tool, or pattern. But it's very important how a trader uses it. If you use it right, it can make you a lot of money. And you can do it if you know how.
If you are having trouble with technical analysis, you should join Market Investopedia. Our research team will help you understand, find, and make sense of different patterns, such as the inverted head and shoulders pattern and many others. Contact us to get started.
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