Besides the positive head and shoulders pattern, investors can also apply a trend-following trading strategy with the inverted head and shoulders pattern. The article below will help readers have a clearer view of the structural features as well as how to place orders for this price model. Let’s consult Forex Trading!
What is the inverse head and shoulders pattern?
The inverse head and shoulders pattern is also known as Inverse Head and Shoulders. This is one of the strongest bullish reversal candlestick patterns. By observing peaks and necklines, investors can know price fluctuations, as well as predict future trends.
Structure of the inverted head and shoulders pattern
The structure of this model includes components such as:
- Left shoulder peak (ie first bottom): Price has a decline, then increases sharply and forms the left shoulder.
- First top (ie middle top): After the first point of the neckline is formed, the price trend continues to decrease, forming a new bottom lower than the original bottom. At the same time, the second point of the neckline also appears.
- Right shoulder top: Indicates that the price is still trending down but creating a new bottom higher than the old bottom. At this time, the market trend has reversed.
- Neckline (also known as neckline): Acts as a resistance line in the price model.
The difference between a positive head and shoulders pattern and an inverse head and shoulders pattern
The appearance of an inverted head and shoulders candlestick pattern is a sign that the price is about to change from descending to ascending, similar to the ascending triangle pattern. The most obvious difference is that the rising triangle pattern appears when the price fluctuates back and forth between two trendlines (acting as resistance and support lines).
The tops of the inverse head and shoulders pattern are upside down. For this type of model, traders need to place buy orders to increase profits. Meanwhile, the favorable head and shoulders pattern is a signal of a trend reversal from bullish to bearish. The tops of the head, left shoulder and right shoulder are all above the neckline. If this pattern is formed, you need to place a sell order when you see the price break out of the neckline.
See more: Analyze & forecast effective candlestick pattern
How to enter orders with the inverse head and shoulders pattern for traders
The way to place trading orders in the inverse head and shoulders pattern is different from the positive head and shoulders pattern.
Technical analysis and determination of standard order placement points
As soon as the market price tends to break the neckline, investors need to determine the entry point to buy. Besides, you can also wait for the candle after the breakout candle to close above the neckline before placing an order. Stop loss should be placed about 1 pip below the lowest candle shadow of the top of the right shoulder. The take profit point is calculated by the distance from the top of the head to the neckline.
Combine the inverse head and shoulders pattern with the candlestick pattern to place orders to reduce risk
During the trading process, investors can consider combining the head and shoulders reversal pattern with reversal patterns candlestick such as Hammer candles, Bullish Engulfing candles, etc. To limit risks to a minimum, traders and Investors need to keep in mind the following things:
- Determine the point to place a buy order before the top of the right shoulder of the pattern is completed.
- Place your stop loss one pip below the lowest shadow of the right shoulder.
- Determine the Take Profit point by calculating the distance from the top of the head to the neckline.
Instructions for trading using the price reversal pattern – Inverted head and shoulders
To trade using this model, investors can apply one of two ways: Wait for the market price to break out of the neckline or wait for the price to retest the neckline.
Wait for the price to break out of the neckline and trade with the trend
When you notice that the price tends to break out of the neckline, traders can enter an order in the following way:
- Determine the order placement point when the closing price of the breakout candle. It is better to wait for the bullish candle to confirm after the breakout candle.
- The Stop-loss point is a few pips below the right shoulder.
- Apply R: R ratio (eg 1:2, 1:3) to take profit.
Wait for the price to retest the neckline and place an order in the candlestick pattern
This way of trading is quite safe, helping investors avoid many risks. However, you should also note that if the market price does not re-test the neckline but continues to move strongly and break out, it is likely that you will miss the best time to enter the order. How to trade this strategy is as follows:
- Determine the point to place a buy order at the neckline right after the market price shows signs of pullback.
- The stop loss is below the right shoulder of the pattern and a few pips away.
- Take profits at a ratio of 1:2 or 1:3.
Enter a buy order at the top of the model’s right shoulder
This trading method is relatively risky. If you have a lot of experience in foreign exchange investing and want to earn high profits, you can consider the following method:
- As soon as the right shoulder peak completes, investors enter a buy order. In case reversal candles appear at the top of the right shoulder, the trading signal is even clearer.
- Place your Stop loss a few pips below the top.
- Apply ratio R: R > 1:3 to take profit.
See more: Broker IC Markets and interesting revelations
Conclude
It can be seen that the inverse head and shoulders pattern reflects the price trend in the Forex market. In particular, investors will gain more profits if they encounter signs such as the top of the left shoulder is higher than the top of the right shoulder, a large slope, the price drops sharply before the pattern appears and increases sharply after the trend reverses. Depending on experience and investment strategy, traders can learn and apply different trading methods.
Above is “all” information about structural features, and instructions for placing orders and trading according to the trend for the inverse head and shoulders price model. To update more new and useful knowledge surrounding the foreign exchange market, don’t forget to refer to the articles at Forex Trading!
FAQs
Below are some frequently asked questions when investors use the Inverse Head and Shoulders pattern in technical analysis.
Besides the Japanese candlestick chart, what tools should traders combine the inverse head and shoulders price pattern with?
To ensure accurate trading signals, investors should use the Inverse Head and Shoulders model with oscillating indicators such as MACD and RSI divergence. Besides, you can also combine it with the Price action method.
What are the limitations of the inverted head and shoulders pattern?
Although the Inverse Head and Shoulders model is suitable for all trading markets, it also has some limitations such as:
- It is difficult for beginner traders to identify the pattern.
- The market price pullback and re-test of the neckline can cause some confusion for investors.
- The confirmation candle can be located quite far below the neckline. This leads to a large stop loss distance and potential risks during the trading process.
- The ratio between profit and associated risk is a factor to consider.
Can the head and shoulders pattern be used when the market is in a sideways state?
The head and shoulders pattern is identified when the market shows a clear trend (up or down). If the price moves sideways, the price chart cannot work effectively. You should limit the use of the head and shoulders pattern in this case to avoid risks.
