To upgrade your trading skills, besides candlestick patterns, DOW theory, and technical indicators… you also have to know more about super classic price patterns. They bring more wins than any other Forex trading method you know. Now, we will learn about the Inverted Head And Shoulders pattern, one of the most accurate methods favored by experienced Forex traders.
What is the Inverted Head And Shoulders pattern?
The Inverted Head And Shoulders is a pattern that signals a future reversal from bearish to bullish. Based on this pattern, the trader can decide to enter a bullish order to make a profit.
Features of the pattern
Remember that the Inverted Head And Shoulders pattern appears in a downtrend. Because this is a bearish-to-bullish reversal pattern, it consists of the following four components.
- Left shoulder is the first trough in the pattern, appearing after a downtrend.
- Head is the next trough, falling deeper than the previous left shoulder.
- Right Shoulder is the third trough of the pattern and its price area is roughly equal to the left shoulder.
- Neckline is a straight line connecting the two upper peaks of the pattern. You need to pay close attention to this line. Depending on the case, the neckline can be horizontal, upward, or downward. This will affect the way we trade for each situation.
Next, you need to understand that some Inverted Head And Shoulders patterns can give very strong reversal signals while others give a lower probability of success. Therefore, you need to know the characteristics that increase its strength.
- Before creating the pattern, the stronger the price fell, the steeper the chart, and the more reliable the reversal signal would be.
- The upward neckline is the most effective case compared to the other 2 cases.
- The left shoulder is higher than the right shoulder, which increases the strength of the pattern.
Market sentiment of the Inverted Head And Shoulders
The trough of the left shoulder and the head of the pattern represent the strength of the downtrend. When the market continuously makes 2 lower lows, the price retracement after creating the left shoulder is just a normal correction in a downtrend. Therefore, at the moment the sellers are still in control of the situation and bearish sentiment is covering the market.
However, the remarkable point appears when the price goes up to make a second high and then fell to make another low (right shoulder). But this time, the market can’t make a lower low indicating that the downtrend is weakening and the buyers gradually regain their strength. If the buyers are strong enough to push the price up and overcome the previous 2 peaks, optimism will return to the market and will push the price higher.
How to trade with the Inverted Head And Shoulders pattern
When the Inverted Head And Shoulders pattern appears, traders can determine the time to enter the order. There are 2 common methods as follows.
Method 1: Enter a bullish order when the price breaks the neckline. The entry point is at the right time when the current candle closes above the Neckline. Place stop-loss below the right shoulder and set the take-profit according to the risk/reward rate as 1:2.
Method 2: Enter a sell order when the price breaks the Neckline and test it again. At this time, investors can place orders when the price retests the neckline. Set stop loss and take profit like method 1.
Note when using
When trading Fixed Time Trade or Forex, to be safe, traders need to be very careful. Here are some notes in trading with the Inverted Head And Shoulders pattern.
- The pattern needs to be completed before you decide to trade. Entering an order earlier will easily lead to loss because of impatience.
- Stop-loss and take-profit are necessary to help traders reduce risk.
- Combine with other technical indicators to confirm reversal signals before trading.
- If the pattern is formed while the price fluctuates strongly because of news, you should not enter the order. Because all patterns are inefficient during that time.
Through the above article, I hope you can seize the opportunity to make a profit right away when you encounter the Inverted Head And Shoulders pattern. Good luck with your trading.
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