Inverse Head and Shoulders Pattern: The Complete Guide

Inverse head and shoulders patterns encourage investors to buy and short sellers to take profits. These 6 methods provide the traders with necessary information to identify the pattern and set targets. Trading an inverse head and shoulder pattern the right way is important as it helps with fixing a profit target. The strengths of an inverse head and shoulder pattern help with the trading strategy as they provide the necessary key information. In an aggressive approach, traders prefer to enter the market when the price breaks above the neckline; usually, they place a buy stop order above that point.

The Head and Shoulders Pattern: How to Trade Tops and Bottoms

Premium cross-platform web charts with proprietary trading tools and powerful stock screens. The extent of the breakout move can be estimated by measuringfrom the top of the middle trough up to the neckline. This target is then projected upwards from the point of breakout. The extent of the breakout move can be estimated by measuringfrom the top of the middle peak down to the neckline. This target is then projected downwards from the point of breakout. Stick to these rules and manage your risk levels accordingly, and you should find a successful outcome with the pattern over time.

Combining the Inverse Head and Shoulders Pattern with Other Technical Analysis Indicators

Never trust an inverted head and shoulders pattern where the neckline is clearly descending (the second peak being lower than the first). A bullish head and shoulders has three troughs, with the middle one reaching lower than the other two. The inverse head and shoulders pattern is the opposite of the head and shoulders, indicating a reversal from a bearish trend to a bullish trend. Of these, the second trough is the lowest (the head), and the first and third are slightly shallower (the shoulders).

Significance of Testing the Neckline in the Inverse Head and Shoulders Pattern

Understanding trader psychology is crucial in technical analysis. Behavioral finance studies suggest that chart patterns like the inverse head and shoulders can be explained by cognitive biases such as herd behavior and representativeness heuristics. A head and shoulders pattern consists of a peak followed by ahigher peak and then a lower peak with a break below the neckline. The neckline is drawn through the lowest points of the two intervening troughs and may slope upward or downward. The inverse head and shoulders chart is a very basic, but popular chart pattern to trade.

The rules slightly differ for aggressive (risky) and conservative approaches. Stay on top of upcoming market-moving events with our customisable economic calendar.

In this FXOpen article, we will tell you how to spot the inverse head and shoulders pattern and build your own strategies with this formation. Profit targets in an inverse head and shoulders pattern are typically targeted using the vertical distance between the neckline and the lowest point of the head. This distance is known as the price objective and serves as a guidance for potential upward movement after the breakout. Finally, with the breaking of the neckline, optimism turns into bullishness.

Trading the pattern in the direction of the breakout offers a high probability reversal setup. To identify this formation on the chart, you need to find a downtrend, which is close to a reversal. To determine whether the trend is becoming weaker, you can use trend strength indicators like ADX. You can identify the average length of a trend on a timeframe you trade and compare it to the one you plan to trade in. It’s known that traders, even with little experience, use the head and shoulders pattern. The inverse head and shoulders is one of the most common patterns experienced traders use in their journeys in the trading world.

No testimonial should be considered as a guarantee of future performance or success. If this does happen, it displays how the bears are becoming less aggressive and the downward momentum is running out of steam adding to the probability of a reversal. 2 – Keep an eye out for three consecutive dips, where the middle one (the head) falls lower than the other two (the shoulders). As indicated by the chart of the Eurostoxx 50 index (Europe 50 on FXOpen), its value climbed above the psychological level of 5000 points in early 2025.

1. Another reason why volume matters is from the perspective of momentum.
2. During the formation of the left shoulder, volume generally decreases as the left shoulder forms, reflecting waning selling pressure.
3. An inverse head and shoulders trading strategy is to scan the daily stock financial market charts for bearish price trends of -15% or more.
4. Perhaps this would not be perfect for some, but it is worthwhile noting that these formations can differ significantly.
5. For example, a 15-minute timeframe price chart means an inverse head and shoulders pattern will take a minimum of 16.25 hours (15 minutes x 65) to form.
6. Inverse head and shoulder patterrns are used with the volume indicator, moving averages overlay, R.S.I., volume profile, and pivot points.
7. But as much as I like them, they pale in comparison to using simple support and resistance levels.

A successful retest of the neckline strengthens the validity of the pattern and provides additional confirmation for a bullish reversal. Another type of confirmation is waiting for the price to close above the neckline and even retest it as support before entering a trade. Additionally, traders would employ technical analysis indicators like the RSI or MACD for further confirmation. During the breakout of the neckline, a significant increase in volume as the price breaks above the neckline is a strong confirmation signal. It indicates that the market participants are in agreement about the asset’s bullish prospects.

1. However, this extreme point often attracts bargain hunters who consider the asset significantly undervalued, leading to a rally.
2. The time frame required for this close depends on which time frame is best respecting the neckline.
3. A false breakout occurs when the price moves above the neckline but quickly reverses, failing to sustain the upward momentum.
4. Short squeezes can introduce a lot of volatility into stocks and send share prices sharply higher.
5. Consider practising identifying and trading this pattern, then open an FXOpen account to implement your strategy in real market conditions.
6. The subsequent decline, forming the inverted head, represents a further price dip to a lower swing low price.

Also, a false breakout may indicate that the asset is not yet ready for a bullish reversal, suggesting that the bearish sentiment still prevails. Moreover, the occurrence of a false breakout often necessitates a re-evaluation of one’s trading strategy, including risk management techniques. False breakouts in the context of the inverse head and shoulders pattern can have significant implications for traders. A false breakout occurs when the price moves above the neckline but quickly reverses, failing to sustain the upward momentum. Next, with the formation of the head of the inverse head and shoulders pattern, the sentiment moves from extremely pessimistic to cautiously optimistic.

Meanwhile, the eventual target is derived by projecting the neckline to head height from the eventual breakout point. There is frequently a correction back to the neckline, which then acts inverted head and shoulder pattern as a support level. Go long on a reversal signal and place a stop-loss one tick below the support level. Inverse head and shoulder patterrns are used with the volume indicator, moving averages overlay, R.S.I., volume profile, and pivot points. The opposite of a bullish inverse head and shoulders pattern (head and shoulder bottom) is a bearish head and shoulders pattern (head and shoulders top). Once you’ve identified the pattern as outlined in this post, it’s simply a matter of waiting for the market to break above the neckline.