Inverse head and shoulders pattern

Before reading this lesson, you should have previously read through:

The inverse head and shoulders pattern (also known as a reverse head and shoulders or head and shoulders bottom), is the opposite of the standard version as it occurs after a downtrend and signals a potential reversal to the upside. This lesson shows you how to identify the inverse pattern and introduces two ways you can use it to look for possible buying opportunities.

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Identifying the inverse head and shoulders pattern

Just like the standard pattern, the inverse head and shoulders consists of a left shoulder, head, a right shoulder and a neckline.

The chart below demonstrates what the pattern looks like:

Inversedheadandshoulders example1

number_1 Left shoulder
number_2 Head
number_3 Right shoulder
number_4 Neckline

You can practice how to find inverse head and shoulder patterns in the following exercises:

Exercise 1: Identify the inverse head and shoulders pattern Show exercise
Exercise 2: Identify the inverse head and shoulders pattern Show exercise

Trading the inverse head and shoulders: method one

Once you have identified an inverse head and shoulders pattern in a downtrend and the right shoulder has been completed, you can look to enter a buy order once the price breaks through the neckline. Wait for a candle to close above the neckline before entering the market to avoid a false breakout.

The chart below shows where the buy order should be placed:

Inverseheadandshoulders entrymethod1

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
el1 Long entry when the candle closes above the neckline.

The stop loss can be placed below the right shoulder:

Inverseheadandshoulders stoplossmethod1

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
el1 Long entry
sl2 Stop loss below the right shoulder

The take profit level is calculated by measuring the distance between the head and the neckline of the pattern, and then placing the target the same distance from the neckline in the direction of the breakout.

Inverseheadandshoulders method1

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
number_5 Distance from neckline to the head
number_6 Same distance as the neckline to the head
el1 Long entry
sl2 Stop loss
tp3 Take profit – same distance away from the neckline, as the neckline to the head

You can practice where to place the entry, stop loss and take profit in the exercise below:

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

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Trading the inverse head and shoulders: method two

The second way to trade an inverse head and shoulders pattern is to wait for the price to trade above the neckline (broken resistance) and then look to place a buy order on the retest of the neckline (broken resistance now becomes support).

Inverseheadandshoulders entrymethod2

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
number_5 Price breaks through the neckline and retests the neckline as support
el1 Long entry as the price find support at the neckline

The stop loss would go below the new support area:

Inverseheadandshoulders stoplossmethod2

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
number_5 Price tests the neckline as support
el1 Long entry
sl2 Stop loss goes below the right shoulder.

The profit target goes the same distance away from the neckline, as the height between the head and the neckline:

Inverseheadandshoulders method2

number_1 First shoulder
number_2 Head
number_3 Second shoulder
number_4 Neckline
number_5 Distance between neckline and the head
number_6 Same distance form the neckline to the head
el1 Long entry
sl2 Stop loss
tp3 Take profit is the same distance away form the neckline as the distance between the head and the neckline

You can practice where to place the entry, stop loss and take profit according to method 2 in the following exercises:

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

Summary

So far you have learned that...

  • … the inverse, or reverse head and shoulders is a reversal pattern that occurs after a downtrend and indicates possible buying opportunities.
  • ... You enter when the price breaks through the neckline after the right shoulder has completed and the candle has closed above the neckline. The stop loss would go below the right shoulder and the profit target would go the same distance away from the neckline, as the neckline to the head.
  • ... the second way that you can enter, is to wait until the price breaks through the neckline and then comes back down to retest the neckline as support. The stop loss would go below the new support level and the profit target goes the same distance away from the neckline, as the neckline to the head.

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  • Hi,
    I think there is a mistake in the S/L part ( Trading H&S method 2 ). In the steps part under the chart which determines the stop loss. Shouldn't the description be 'Stop loss under the new resistance level under neckline' instead of ' below the right shoulder' ?

    Thank you
  • Hi Martin,
    Thanks for pointing out we will review the text!
    Regards.
    Peter
  • It has been very difficult for me to identify different patterns. How can i master recognizing right pattern? Many times i have lost money because my pattern was wrong.
  • Hi Faizan,
    You need to practice a lot. Draw up some rules and follow those rules consistently. Are you doing things always the same way?
    Regards.
    Peter
  • I use to draw a pattern, suppose i think it is head and shoulders but it comes out to be another pattern or not a pattern at all and my trade goes negative.
  • Method 1 has unfavorable risk reward ratio. At least suggest a trailing stop as method in the take profit area. Or raise the stop loss level above the buy entry.
  • Hi Kees Cash,

    Thank you for your observation.

    The point was to demonstrate the basic principles of trading the inverse head & shoulders pattern, but your suggestions are great to take it to pro level. How do you trade? Do you trade patterns and formations?

    Share a bit more about your style.

    Regards
    Peter
  • I need to incorporate graph patterns more into my trading arsenal. Currently I try to trade trendbreaks and hold on to the new trend as long as possible. It is a bit tricky these days as normal stop loss levels are mostly broken by the aid of large financial institutes. Therefore I look for swing trades so I can use wider stop loss levels while maintaining 1:3 risk reward ratios or I take intraday profits 1:2. In some cases where useful I will hedge a swing trade when it temporarily reverses, i.e. retracements/corrections.
    I am not an advanced trader, I am learning still. This website got me up to speed. For steep learning curves join a social trading group with chat.

    regards
  • Hi Kees Cash,
    You are at the right place then! We can discuss here trade setups and much more about trading. Looking forward to it.
    Have a nice weekend.
    Regards
    Peter

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