Inverse Head and Shoulders Pattern: A Bullish Reversal Signal
The Inverse Head and Shoulders Pattern is a reliable bullish reversal pattern seen in technical analysis. It often marks the end of a downtrend and the beginning of a potential upward move, making it a favorite among swing traders and investors.
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What is an Inverse Head and Shoulders Pattern?
This pattern is the opposite of the traditional Head and Shoulders pattern. It forms three lows:
- Left Shoulder: A price decline followed by a small rally.
- Head: A deeper decline followed by a rally.
- Right Shoulder: A higher low similar to the left shoulder.
The Neckline is a resistance line drawn across the highs between the shoulders and the head. When the price breaks above this neckline, the pattern is confirmed.
How to Trade the Inverse Head and Shoulders Pattern
Follow these steps to trade the pattern effectively:
- Confirmation: Wait for a clear breakout above the neckline.
- Entry: Enter a long (buy) position once the price closes above the neckline.
- Stop Loss: Place your stop loss just below the right shoulder.
- Target Price: Measure the distance from the head to the neckline and project that upward from the breakout point.
Example
Suppose a stock forms:
- Left Shoulder: ₹320
- Head: ₹300
- Right Shoulder: ₹310
- Neckline: ₹350
After a breakout above ₹350:
- Entry: ₹355
- Stop Loss: ₹305
- Target: ₹350 + (₹350 - ₹300) = ₹400
Key Characteristics
- Volume often increases during the breakout, confirming bullish momentum.
- Works best on higher timeframes (4H, daily, or weekly charts).
- Often followed by a retest of the neckline after the breakout.
Conclusion
The Inverse Head and Shoulders pattern is a powerful signal for a trend reversal from bearish to bullish. Traders who identify and trade this setup correctly can benefit from strong upside potential, especially in oversold markets.
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