Description:
The Inverse Head and Shoulders pattern is a bullish reversal configuration observed at the end of downtrends. It consists of three troughs: the central trough (head) is the deepest, flanked by two shallow troughs (shoulders). The reversal is confirmed when the price breaks above the neckline.
Input Parameters:
- Retracement: Apply Fibonacci retracements.
- Bands: Apply ATR, St.Dev, Constant, or Percentage bands.
- Head height - Distance between leg shoulder peak and head.
Use Cases:
- Pattern Identification: Detects the formation during or after a significant uptrend, focusing on the three peak structures and the neckline support.
- Entry Point: The completion of the pattern is confirmed when the price falls below the neckline after forming the right shoulder. Traders often consider this breakdown as an entry point for a short position.
- Stop-Loss Placement: To manage risks, a stop-loss is typically set just above the right shoulder or the head's peak, protecting against the possibility of the trend resuming its upward direction.
- Profit Targets: The profit target can be calculated by measuring the vertical distance from the head's peak to the neckline and then projecting that distance downward from the point where the price breaks the neckline.
Additionally, a bearish version of this pattern, known as the Head and Shoulders, signals a reversal from an uptrend to downtrend. It features a central trough (head) flanked by two shallow troughs (shoulders), with a breakout below the neckline serving as a bearish signal. For both patterns, traders should seek confirmation through volume analysis—ideally, volume should increase on the breakout or breakdown—and consider other technical indicators to validate the reversal signal.
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