Inverse Head and Shoulders Pattern

The so-called “Inverse Head and Shoulders” pattern is a bullish reversal pattern that takes several candles to form. Essentially what you have is the market falling, and making a fresh low. After a short-term rally, the market falls again and goes even lower. At this point in time, you would expect the sellers to take control. After all, you have made a fresh new low. However, at the third attempt to break down the market, you can see that the low isn’t as low as the second attempt. This means that the sellers are perhaps running out of momentum.

The pattern is three attempts to break down the marketplace, with the middle one being the most successful. Because of this, it looks like to shoulders with a head between them. Granted, this is upside down, hence the term inverse. You also have a neckline, which is essentially the downtrend line that eventually gets broken to the upside. Once that happens, the buyers have completely turned the tables on the sellers.

Inverse Head and Shoulders formation.

Inverse Head and Shoulders formation.

Looking at the trade below, you can see that the sellers had success at the first attempt, even more success at the second attempt, but the third attempt showed them not quite as successful as previously. Once we broke the neckline, we continue to go much higher. In fact, you can see that the target was head. In this pattern, the target is equal to the height of the pattern itself. You take this measurement from the neckline to the tallest part of a pattern, or the top of the head.

Inverse Head and Shoulders in action.

Inverse Head and Shoulders in action.

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