All traders aim to buy low and sell high, but only a few have the courage to go against the crowd and buy when the downtrend reverses.
When the price falls, the negative sentiment and fear will drop to the extreme, but it is at such times, head and shoulders pattern inverse (IHS) may appear.
The model (IHS) has a similar structure to head and shoulders pattern (H&S) formed on top, but the shape was reversed. When completed, the pattern (IHS) signals the end of the downtrend and the start of a new uptrend.
Do you know about the inverse head and shoulders pattern?
The pattern (IHS) is a reversal setup that forms after a downtrend. It has a head, a left shoulder and a right shoulder and is located below a neckline. A breakout and close above the neckline will complete the setup, indicating that the downtrend has reversed.
As shown above, the asset is in a downtrend but after a significant drop, the bulls believe that the price has reached an attractive level and will start to bottom. When demand exceeds supply, the asset forms its first bottom and begins a slight rally. This creates the left shoulder.
In the downtrend, the bears will continue to sell strongly after the pullback and the price drops below the first low, making a lower low. However, they could not take advantage of this weakness to continue the downtrend. The bulls continued to buy the dip and started a slight rally, forming the top of the pattern. As the price neared the previous peak, where the rally had stalled, the bears stepped in again.
Prices fell again, culminating in the formation of a third bottom, roughly coinciding with the first as buyers anticipated a change in momentum and bought aggressively. This makes up the right shoulder of the setup. The price turns bullish and the bulls will take this opportunity to push the price above the neckline, completing the pattern.
After that, the neckline becomes the new floor because traders ( Trade coin ) will buy the dip when the price drops to this support level. This signals the start of a new uptrend.
How to identify new uptrend with pattern (IHS)
Bitcoin (BTC) [ Buy and sell BTC fast ] has been in a downtrend since forming a local top at $ 13,970 on June 26, 2019. Buyers stepped in and captured the drop in the $ 6,500 – $ 7,000 support zone, forming left shoulder of the model (IHS). This helped the price initiate a relief rally to $ 10,450. At this level, profit-taking pressure from short-term traders and new short positions by bears sent the price down once again.
The aggressive selling then broke the $ 6,500 – $ 7,000 support area and the BTC/USDT (V) dropped to $ 3,782.13 on March 13, 2020. Bulls see this sharp drop as a buying opportunity and that prompted a strong rally, reaching near $ 10,450. This move made up the beginning of the setup.
The right shoulder is shallow as selling pressure has subsided and the bulls are not waiting for a deeper correction to buy. Finally, the bulls pushed the price above the neckline on July 27, completing.
The bears attempted to trap the aggressive bulls pulling the price back below the neckline. However, the bulls did not allow the pair to sustain below $ 10,000, a sign of a change in sentiment. Momentum picked up as buyers pushed the price above $ 12,500.
How to calculate the goals of your IHS setup that you need to know
To calculate the model's minimum target (IHS), calculate the depth from the neckline to the lowest point. In the example above, the depth from the neckline at about $ 10,450 to the lowest point at $ 3,782.13 is $ 6,667.87.
Then, adding this value to the breakout level ($ 10,450), we get the pattern target of $ 17,117.87. When a trend changes, it can hit lower or exceed the target. Therefore, traders should use the target as a guide and not dump just because it has reached the target of the setup.
Your patience will pay off because sometimes the setting is disabled
No pattern succeeds every breakout and traders should wait for the setup to complete before initiating trading. Sometimes, the structure of a pattern has formed but the breakout does not occur. Those who trade before the pattern completes will be stuck when the price drops.
Eg: LINK peaked at $ 4.58 on June 29, 2019 and started to correct. The bulls have managed to halt the drop at the $ 2 – $ 2.2 zone. This forms a pattern (IHS).
Although the price touched the neckline on August 19, 2019, the buyers were unable to push the price above it. Therefore, the pattern is not completed and the buy signal is not triggered.
The LINK/USDT pair turned down from the neckline and broke below the top of the setup at $ 1.96, invalidating the pattern. Early traders will be trapped by this move.
Important things to note
Patterns (IHS) can be a useful tool for traders who find the start of a new uptrend. However, there are some important things to remember when using this setup.
Traders should wait for the pattern to complete, which happens after the price breaks and closes above the neckline, before initiating any long positions. A breakout above the neckline on above-average volume is more likely to lead to a new uptrend than a breakout on low volume.
When a trend is reversed, it usually continues for a long time. Therefore, traders should not rush to dump just because it has reached the target of the pattern.
There are still some exceptions like the completed pattern but the price quickly reverses direction and plummets. Traders should keep a close eye on other indicators and price action before increasing their positions.