It is the complete opposite of the head and shoulder pattern chart pattern forex trading strategy.
If you know what you are looking for then spotting the inverse head and shoulders pattern is quite easy. .
Now, the inverse head and shoulders chart pattern is considered a bullish reversal chart pattern.
Which means that if you see this chart pattern in a downtrend, then it may be a signal that the downtrend is ending and therefore you should be looking to buy.
Here’s what an inverse head and shoulders pattern looks like:
HOW INVERSE HEAD AND SHOULDERS PATTERN FORMS
Now lets look at what each of the number from 1 to 7 on the head and shoulders pattern mean (refer to chart above):
First of all, the market has be in a downtrend for some time:
- buyers come in at the low (left shoulder) and push the price up (which results in a beginning neckline).
- What happens next is that sellers soon return to the market and push prices to new lows(the inverted head).
- However, the new low (head) is not sustained as price rises back up due to buyers pushing price up to create a continuing neckline.
- Then sellers enter again pushing the price down to a low, but this low does not exceed the previous low (the head). This low is the right shoulder.
- Buyers get in and push the price up and this time the neckline is intersected to the upside.
- Seller may get in here and push price down to test the neckline that was intersected which would now act as a support line.
- Buyers get in push the price up-now an uptrend in “officially’ in progress!
HOW TO TRADE THE INVERSE HEAD AND SHOULDERS CHART PATTERN
There are two options on how you can trade the inverse head and shoulders pattern:
- Wait for a candlestick to break the neckline to the upside.
- Then place a buy stop order just a few pips (3-5 pips at least) above the high of the candlestick the intersects the neckline.
- Place you stop loss 3-5 pips below the low of the right shoulder.
- Once price breaks the neckline, just wait for price to pull back down to touch the neckline which it intersected. This intersected neckline would now act as a support line.
- Once it touches the neckline, place a buy stop order 3-5 pips above the high of the candlestick that touches the neckline.
- Place you stop loss anywhere from 10-50 pips(depending on which timeframe you are trading in) just below where your buy stop order is placed.
- Try to use the bullish reversal candlestick patterns (click the link to check it out) as your short entry confirmation on this option 2 entry style.
TAKE PROFIT OPTIONS
Here are a couple of options for placing your take profit targets:
- Take profit option 1 is to 3 times the amount you risked in pips.
- A second option would be see a previous swing high point where price moved down from, and use that level as your take profit target.
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