Inverted Head and Shoulder will indicate a bullish reversal condition. Inverted Head and Shoulder is a common reversal pattern. For more details about Inverted Head and Shoulder itself, you can understand more clearly through the article below. Also, make sure to register and join to trade with GIC!

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Understanding Inverted Head and Shoulders

The reverse head and shoulders is a trend reversal pattern. It will signal the desire for a bullish reversal. The theory is the same as the triple bottom except that the second bottom will be lower than the others, which are technically at the same height. The inverted head and shoulders pattern will be formed by three bottoms that will succeed. The first and third tails are of the same height.
 
They are said to form the shoulders. The second top is lower than the others so it represents the lowest point. This is the head. There are some rules for many investors that say that the height of the head should be 1.5 or 2 times lower than the shoulders. Investors also agree that the distance between each bottom should be the same. This is the main point to identify the pattern.
The highest reached between the shoulders and the head forms the neckline (red below) which acts as resistance. The neckline can be ascending (38% of cases), descending (40% of cases) or horizontal (22% of cases). It is the breakout of resistance that validates the reversal pattern. The target price is equal to the distance between the neckline and the bottom of the head which we carry symmetrically to the neckline. This pattern is well known to investors and that is what makes it successful.

Characteristics of the Inverted Head and Shoulders Pattern

The inverted head and shoulders pattern is used as an indicator. This pattern is associated with a reversal of a downward price trend. This is one of the more common reversal indications. As price moves back down, it hits a low (trough) and then begins to recover and swing up. Market resistance then pushes it back up to another trough. Price drops to a point where the market can no longer support the lower price, and it begins to rise again.

Once again, market resistance forces price back down, and it drops one last time. If the market can’t support the lower price, it won’t reach the previous low. This causes a higher low before price moves up again. This movement creates three troughs, or lows: the left shoulder, the head, and the right shoulder.



inverted head and shoulders. You will notice two rallies or pullbacks occur during this pattern. One occurs after the left shoulder, and one after the head. The highs of these pullbacks are connected by a trendline, which extends to the right. This trendline is called the “neckline” or “resistance line.”

3 troughs prove seller fatigue

Price drops to a point where the market cannot support the lower price and price starts to rise again. Once again, market resistance forces price back down, and price falls one last time. If the market cannot support the lower price, it will not reach the previous low. This causes a higher low before price rises again. This swing creates three lower lows, or troughs. They are called the left shoulder, the head, and the right shoulder.
  • Left Shoulder: This is a pullback against a downtrend due to profit taking or buyers looking to enter the market.
  • Head: Means sellers are still in control as they push prices lower. However, buyers are also stepping in, which explains the “stronger” pullback to retest the previous swing high.
  • Right Shoulder: Shows that sellers are getting weaker because they are unable to push prices lower. Conversely, buyers are getting stronger because they continue to push prices higher, retesting the resistance area (which is the initial swing high).
Example of Inverted Head and Shoulders
 


The above image is an example of an Inverted pattern formed on the hourly chart of Bandhan Bank Ltd. The stock witnessed a sharp move post the breakout from the pattern on very high volumes. One important thing to note here is that the stock retested the neckline here. Let us look at a few examples of how an inverted head and shoulders pattern might look on a real life chart.



Real-life example of an inverse head and shoulders pattern of AUROPHARMA stock (Source: Trading View)

A real example of the Inverse Head and Shoulders Pattern in the traditional stock market

One example is Aurobindo Pharma (AUROPHARMA). In March 2018, the stock price fell from around $625 to $544 and then rebounded to $623 in April 2018. This formed the left shoulder of the chart pattern. The price then pushed down to a lower low at $526, forming the low of the head. Eventually, the market recovered, and the price reached the neckline at $630. This was followed by the final trough, which consisted of a final smaller drop to $565. Finally, the stock price broke through the neckline slightly at $635.



Bitcoin cryptocurrency market example with inverse head and shoulders pattern


Real life example of Inverse Head and Shoulders Pattern in crypto market

Another example of an inverse head and shoulders chart pattern can be seen recently in the Bitcoin market. In May 2021, the cryptocurrency price dropped from around $57,500 to below $54,000, forming a small left shoulder. It then recovered to around $57,000. After that, the Bitcoin price plunged to a deeper trough of $48,000, with many turbulent fluctuations along the way as bears and bulls battled for control of the market.
 
The price then rose to around $55,000 again, before dropping to $53,000, forming the right shoulder. Finally, the price broke through the neckline, completing the inverse head and shoulders chart pattern. As can be seen from this example, the real-life inverse head and shoulders pattern may not always follow the textbook version.
 
The Bitcoin price fluctuated greatly even while it was forming the chart pattern, instead of experiencing an immediate drop or rise. There was also a pullback after the initial break through the neckline. This is why it is important to study the broader market context and trends, and hone your discernment about whether to enter a trade.

How to Read Inverted Head and Shoulders

To identify the inverse head and shoulders pattern on a trading chart, you need to find three bases with the following components – left shoulder, head, and right shoulder. Furthermore, the pattern appears at the end of a downtrend and should have a clear neckline that is used as a resistance level. On the AUD/JPY chart below, you can see how the inverse head and shoulders pattern formed after a bearish trend and included the left and right shoulders as well as the lower head level. As soon as the price broke above the neckline level, a new bullish trend began.

Also Read : 

Head and Shoulders Pattern: Ciri, Cara Baca, dan Contoh Pola




With the above in mind, the following steps can help you in identifying and using the inverse head and shoulders pattern in forex trading:
  1. Identify the three lowest levels after a downtrend which include the left shoulder, head and right shoulder.
  2. Find the neckline resistance level
  3. Wait for a breakout to occur and place a buy order after the candle closes above the neckline.
  4. Set a stop-loss order below the neckline (preferably at the lowest level of the right shoulder) and use the reward ratio.
After learning about Inverted Head and Shoulder, then you can read and take further action regarding this candlestick pattern yourself. In addition, be sure to read other articles from the GIC Journal such as How to Read and Trading Strategy for the Golden Cross Pattern.