The Logic Behind the Inverse Head and Shoulders Pattern – Part 1
Forex Blog Articles
The Inverse Head and Shoulders Pattern
This video will demonstrate a trading strategy called the inverse Head and Shoulders Pattern.
The head and shoulders pattern is a very powerful reversal pattern that usually occurs after a significant trend.
The Head&Shoulders pattern is a very popular chart pattern among forex traders, this pattern is a very powerful reversal pattern, This video shows two samples of Head and Shoulders pattern but most important it explained the logic behind the price action in this pattern.
Understanding Head & Shoulders Chart
The head & shoulders pattern usually appears after a significant uptrend or downtrend. It is a very useful and powerful pattern once you know how to define it.
I think most of the traders don’t understand the logic of the price behind the pattern.
This chart shows a head & shoulders pattern in GBP/USD very clearly.
The first triangle is the left shoulder, the middle one is the head and the third triangle is the right shoulder.
This specific chart is rather symmetrical and clear, but not all charts are this clear, here the left and right shoulders are almost the same height, but it’s not always the case.
The bottom lines are also at the same level (the neckline).
Head and Shoulders Pattern
The Logic of the Head & Shoulders Chart
The price just arrived in the area after an uptrend. Every new low that the price creates is higher than the one before it.
From that level, the price creates a new high which is higher than the previous high. After that, the price starts to correct down, and then after a few lows that the price creates it starts to create a new bottom which is the same level as the previous one. That indicates that the sellers are starting to get back in the game and dominate after the buyers which are the bullish momentum. That’s the main idea of the head & shoulders pattern.
Reversal Head & Shoulders
Inverse Head and Shoulders Pattern
This is a head & shoulders pattern after a downtrend. What defines it is that every time the price creates a new high it should be lower than the previous one, until the highs with the tops at the same level for the left shoulder, the head and the right shoulder. This indicates that the buyers are becoming more dominant in this price action.
when the price creates a high at the same level as the previous high after the downtrend it could indicate that we should soon see the momentum switch from bearish to bullish
and that happens only when the price totally breaks out the neckline.
When the price creates a new high it still does not indicate a change in the momentum but it indicates that it might happen soon.
Inverse Head and Shoulders Bottom Line
An inverse(reverse) head and shoulders or head and shoulders bottom is similar to the standard head and shoulders pattern, is a reliable pattern that can also signal that a downward trend is about to reverse, it occurs all on time frames, and in all markets.
As we mentioned before the Inverse Head and Shoulders pattern is a very powerful reversal pattern that usually occurs after a significant trend.
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