Hey traders,
Inverted head and shoulders pattern is a classic reversal pattern.
It signifies the weakness of buyers in a bearish trend and a bullish accumulation.
⭐️The pattern has a very peculiar price action structure:
Trading in a bearish trend the price sets a lower low and retraces setting a lower high (left shoulder),
then the market goes lower setting a new low but instead of setting a new lower high, the price returns back to the level of a previous lower high setting an equal high (head).
After that bears start pushing again but with an amplifying bullish pressure, the market sets a higher low and returns back to equal highs setting a new one (right shoulder).
🔔Equal highs form a horizontal structure called a neckline.
Here is a perfect example of a completed inverted head and shoulders patterns, that was formed in a bearish trend on Gold on a 4H time frame.
Once the pattern is formed it is still not a trend reversal predictor though.
The trigger that is applied to confirm a trend reversal is a bullish breakout of a neckline of the pattern.
Above, the breakout of the neckline is the indication of a confirmed bullish reversal.
📈Then a long position can be opened.
For conservative trading, a retest entry is suggested.
Safest stop is lying at least below the right shoulder.
However, in case the heights of the right shoulder and head are almost equal it is highly recommendable to set a stop loss below the head level.
🎯For targets look for the closest strong structure resistances.
After a retest of a broken neckline, Gold bounced. Entry was lying on a neckline, stop loss below the right shoulder, target was based on a closes strong resistance.
What pattern do you want to learn in the next post?
