Dear Traders,
We all strive to make a profit in financial markets.
Sometimes we succeed in our trades, while other times we may fail. This is a
situation that every trader, whether beginner or experienced, has faced or will
face. The important thing is to increase our success rate. To do this, we must
use fundamental analysis, technical analysis and chart patterns correctly.
Chart patterns provide us with a great advantage in decision-making processes
when placing buy and sell orders. One such pattern is the Inverse Head and
Shoulders (IH&S or IHS) pattern. In this article, we will conduct a detailed
examination of the definition, formation, and use of the IHS pattern in
trading.
What is an Inverse Head and Shoulders Pattern?
Many of you are already familiar with chart patterns in
technical analysis. You can find various resources on our site about
continuation patterns, reversal patterns and neutral patterns. The Inverse Head
and Shoulders pattern belongs to the reversal reversal patterns category. This
pattern appears at the end of a downtrend, indicating that the trend is about
to reverse. The Inverse Head and Shoulders (IHS) pattern is one of the most
valuable and reliable trend reversal patterns used in technical analysis. The
IHS pattern indicates that the current downtrend is coming to an end and that
the market is about to change direction. The formation of this pattern
signifies that sellers are starting to weaken and buyers are gaining strength.
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| Inverse Head and Shoulders Chart Pattern. |
The Inverse Head and Shoulders (IHS) pattern is generally a
strong reversal pattern that indicates the end of a downtrend and the beginning
of an uptrend. The Inverse Head and Shoulders pattern can be used in
various markets, such as stocks, forex, commodities, and cryptocurrencies. The
broad applicability of this pattern allows traders and investors to employ
similar strategies across different markets. Moreover, the IHS pattern can be
effectively used on both daily charts and long-term charts. This pattern is
also a reflection of market psychology and the sentiment of market
participants, which is why it holds a special place in technical analysis.
Definition and Formation of the Inverse Head and Shoulders Pattern
The IHS pattern has a structure that is easily identifiable
and understandable on the chart. The pattern presents itself with three low
points on the chart. These low points are called the left shoulder, the head,
and the right shoulder. The Inverse Head and Shoulders (IHS) pattern indicates
the approach of the end of a downtrend and the reversal of the trend. The left
shoulder usually represents the first low point, followed by a slight
recovery in prices. Subsequently, the second and lowest low point, called the head,
forms. Finally, the third low point, known as the right shoulder, forms,
usually near the level of the left shoulder. Above these three low points,
there is a "neckline" that connects the peak points of the
left and right shoulders. The neckline can be clearly seen with the formation
of the left shoulder, head, and right shoulder. This simple and clear structure
makes it easier for both beginner traders and experienced technical experts to
identify and analyze the pattern.
- Left Shoulder: During a downtrend, the price falls to a certain point and then rebounds slightly. This forms the left shoulder.
- Head: The price falls again and reaches a lower point than the left shoulder, then rebounds again. This forms the head, which is the lowest point of the pattern.
- Right Shoulder: The price falls again, but stops near the previous low point without going below the head, then rebounds again. This forms the right shoulder.
- Neckline: It is a horizontal or slightly sloping line that connects the peak points of the left shoulder and the right shoulder. This line indicates that the pattern has completed and signifies a critical level at which the price is expected to reverse.
The easily identifiable structure and wide applicability
contribute to the popularity of the Inverse Head and Shoulders (IH&S)
pattern among traders. Additionally, by correctly analyzing the IH&S
pattern, we can more effectively predict trend reversals in the markets. For
the pattern to be completed, all price movements must be clearly formed. When
the pattern is completed, it shows a three-bottom appearance on the price chart
and consists of an inverted head and two inverted shoulders.
Trading with the Inverse Head and Shoulders Pattern
The IH&S pattern has a higher reliability rate compared
to many other technical patterns. Correctly identifying this pattern and
breaking the neckline (resistance) upwards provides market followers with a
strong signal that the market is changing direction. Therefore, the IH&S
pattern is frequently monitored and used by medium and long-term traders. In
this context, the Inverse Head and Shoulders (IH&S) pattern is one of the
most useful patterns to pay attention to in financial trading. During the formation
of the left shoulder and head, sellers maintain dominance, while during the
formation of the right shoulder, buyers begin to enter the market. This
indicates a change in market sentiment, showing that buyers are becoming
stronger than sellers. With the break of the neckline, buyers take full
control, indicating a psychological shift in the market as well.
In the Inverse Head and Shoulders pattern, the pattern is
confirmed when the price breaks above the neckline, and a strong upward trend
usually begins. The breakout of the neckline usually signals a new buying
opportunity. By entering a position at this breakout point, we can take
advantage of the beginning of the uptrend. However, for the pattern to be
confirmed, an increase in volume should be observed during the breakout, and a
bullish candlestick close above the neckline (resistance) must occur. Sometimes,
after breaking the neckline, the price may pull back and retest the broken
line. In this case, if the price resumes its upward movement, it presents an
excellent buying opportunity.
Buying: The best time to buy in the IH&S pattern is when
the neckline is broken strongly. Alternatively, a long position can be taken
when the price pulls back, retests the neckline, and then starts to rise again.
Stop Loss: In the IH&S pattern, the stop loss order can
be placed below the level of the right shoulder.
Target: In the IH&S pattern, the take profit level is
determined by adding the vertical distance from the head's lowest point to the
neckline above the breakout point.
Take a look at the Inverse Head and Shoulders (IHS)
formation that recently appeared on the Coca-Cola Company stock chart. This
formation usually emerges at the end of a bearish trend and signals a reversal
in the market's direction. After breaking above the neckline and starting an
upward movement, the price pulled back and retested the neckline twice, which
resulted in the beginning of a stronger bullish trend.
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| Coca-Cola chart shows IH&S pattern. |
Reminder!
Let's not forget that the Forex market is a risky environment. The Inverse Head and Shoulders (IH&S) pattern, like other technical analysis patterns, can give false signals depending on market conditions. Therefore, it should not be used alone and must be evaluated along with other indicators. Also, fundamental analysis should not be overlooked. Please never forget the golden rule of trading: Always use a stop-loss order and trade with amounts you can afford to lose.