The Inverse Head and Shoulders pattern is the opposite of the Head and Shoulders pattern and is considered to be a major reversal chart pattern in a strong down trending market. The trading pattern is formed by three bottoms (left shoulder, head and right shoulder) and a neckline connecting the temporary highs.
The pattern is confirmed on a sustained break of the neckline after the right shoulder has been formed. The neckline provides resistance and can slope up, slope down or be horizontal. Stop losses are usually placed below the right shoulder.
Forex Inverse Head & Shoulders Chart Pattern Example (EUR/USD Daily Chart)
Forex Inverse Head and Shoulders Trading Ideas
Conservative forex traders: wait for a sustained break of the neckline.
Aggressive forex traders: buy in the vicinity of the right shoulder. Look for bullish reversal candlestick patterns or oversold signals from RSI, Stoch,.. to enter a low risk – high reward trade.
Tip: After a sustained break of the neckline (which now acts as support),
a small retracement back to the neckline is very common. Go long in the vicinity of the neckline with a stop loss placed a few pips below the neckline. Use bullish candlestick patterns to confirm the buy trade.