Inverted Head and Shoulders: A Comprehensive Guide

5 jul

The Inverted Head and Shoulders pattern is a popular and reliable reversal pattern that signals a potential shift from a downtrend to an uptrend. Understanding and identifying this pattern can provide traders with profitable trading opportunities.

Anatomy of the Inverted Head and Shoulders Pattern.

Left Shoulder: The price declines to a trough and subsequently rises.
Head: The price falls again, forming a lower trough.
Right Shoulder: The price rises once more before declining to a trough similar to the left shoulder.

Identifying the Pattern
To accurately identify an Inverted Head and Shoulders pattern, look for the following characteristics:

Three Troughs: The head should be the lowest point, with the two shoulders on either side.
Neckline: Draw a trendline connecting the peaks of the two shoulders. This line acts as a resistance level.
Breakout Confirmation
The pattern is confirmed once the price breaks above the neckline with increased volume. This breakout indicates a reversal of the previous downtrend and the start of a new uptrend.

Trading the Inverted Head and Shoulders
Entry Point
Enter a long position when the price closes above the neckline. To reduce false breakouts, consider waiting for a retest of the neckline as support.

Stop-Loss
Place the stop-loss order below the right shoulder to limit potential losses. This level provides a cushion against false breakouts and unexpected market movements.

Target Price
The target price can be estimated by measuring the distance from the head to the neckline and projecting this distance upward from the breakout point.

Example:
Example Reference image of chart ONGC on Daily Time Frame shared below


Distance from Head to Neckline: 62 points
Breakout Point: 280 points
Target Price: 342 points

Practical Example of ONGC chart

The neckline is drawn connecting the two peaks at 280 level. A breakout occurs at 280 level with increased volume and now candle closed bullish at 288 levels with Good intensity of Volumes.

Key Points to Remember
Volume: Volume should increase during the formation of the pattern, especially at the breakout point.
Timeframe: The pattern can form over various timeframes, but it is more reliable over longer periods.
Market Context: Always consider the broader market context and other technical indicators to confirm the pattern.

Conclusion
The Inverted Head and Shoulders pattern is a powerful tool for traders looking to capitalize on trend reversals. By understanding its structure and applying disciplined trading strategies, traders can enhance their ability to identify and profit from these patterns.

I am not Sebi registered analyst.
My studies are for educational purpose only.
Please Consult your financial advisor before trading or investing.
I am not responsible for any kinds of your profits and your losses.

Most investors treat trading as a hobby because they have a full-time job doing something else.
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If you treat like a hobby, hobbies don't pay, they cost you...!

Hope this post is helpful to community
Happy Trading!
RK💕

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The analysis and discussion provided on in.tradingview.com/u/RK_Charts/ is intended for educational purposes only and should not be relied upon for trading decisions. RK_Charts is not an investment adviser and the information provided here should not be taken as professional investment advice. Before buying or selling any investments, securities, or precious metals, it is recommended that you conduct your own due diligence. RK_Charts does not share in your profits and will not take responsibility for any losses you may incur. So Please Consult your financial advisor before trading or investing.