AUD/NZDThe inverse head and shoulders pattern is a popular chart formation in technical analysis that is often used to predict a reversal in a downtrend. Here’s a breakdown of the pattern:
Structure of the Inverse Head and Shoulders Pattern
Left Shoulder: The price declines to a trough and then rises.
Head: The price declines again, forming a lower trough.
Right Shoulder: The price rises once more, declines but forms a higher trough than the head.
Neckline: A resistance level formed by connecting the highs after the left shoulder and the head.
How to Identify the Pattern
Downtrend: There should be a preceding downtrend to reverse.
Left Shoulder Formation: The price drops to a low (left shoulder), then rises.
Head Formation: The price drops again to an even lower point (head), then rises.
Right Shoulder Formation: The price drops but stays above the previous low (right shoulder), then rises.
Neckline Break: The pattern is confirmed when the price rises above the resistance level (neckline).
Trading the Inverse Head and Shoulders Pattern
Entry Point: Traders typically enter a long position when the price breaks above the neckline.
Stop Loss: A common place to set a stop loss is just below the right shoulder or the head, depending on your risk tolerance.
Price Target: The price target is often determined by measuring the distance from the head to the neckline and projecting this distance upwards from the neckline breakout point.
