There are dozens of bullish chart patterns, not to mention dozens of ways to trade them. From the inverse head and shoulder, double bottom, triple bottom to the rounding bottom chart pattern, it can be overwhelming. For today, I’m going to keep it simple and talk about one that if you can learn to spot it, you can print money.
Table of Contents
- Top 10 Bullish Chart Patterns Every Trader Needs to Know
- How to Use Volume to Confirm Each Stage of Bullish Chart Patterns
Top 10 Bullish Chart Patterns Every Trader Needs to Know
The Inverse Head and Shoulders Pattern Explained
An inverse head and shoulders is an upside-down head and shoulders pattern. It consists of a low, which makes up the head, and two higher low peaks that make up the left and right shoulders.
We see the inverted head and shoulders patterns in major downtrends.
If spotted, they’re moneymakers as the head and shoulders top used to predict reversals. Upon completion, the inverse head and shoulders pattern signals a bull market.
How Do I Identify This Bullish Chart Pattern?
The first and third troughs are considered shoulders, and the second peak forms the head. Once the pattern is confirmed, the price breaks out from the neckline.
To be sure you’re seeing an inverse head and shoulder pattern playing out, you must look for the following in your chart:
- First, price falling to a trough and then rising
- Second, price falling below the previous trough then rising again
- Third, price descending for the third time, but not as far as the second trough
- Finally, price heads upwards and breaks through the resistance found at the top of the previous troughs.
A Special Mention: The Importance of Volume
One thing that needs to be mentioned is the significance of volume in the head and shoulders pattern. Without volume confirmation, this pattern is NOT VALID.
In this particular bullish chart pattern, volume generally follows the price higher on the left shoulder. However, if the head’s formed on diminished volume, it means the buyers aren’t as aggressive as they once were.
Furthermore, if the right shoulder volume is lighter than the head on the last rallying attempt, it signals the buyers may have exhausted themselves.
How to Use Volume to Confirm Each Stage of Bullish Chart Patterns
- An increase in volume should accompany the inverted left shoulder.
- The bullish inverted head must be made on lighter volume.
- The rally from the head must have a greater volume than the rally from the left shoulder.
- Ultimately, the inverted right shoulder has the lightest volume of all.
- When the stock rallies and breaks through the neckline, you’ll see a massive increase in volume. The pattern is complete when the market breaks the neckline.
When Do I Enter the Inverse Head and Shoulders Pattern?
Let’s say you’re pretty confident this bullish chart pattern is happening on your chart. But when exactly should you enter? At the first trough?
What about the second trough? To be safe, traders generally go long when the price rises ABOVE the resistance of the neckline.
How to Aggressively Trade the Inverse Head and Shoulders Pattern
Before you read any further, a word of caution: do not trade this pattern aggressively unless you’re a seasoned trader. Otherwise, you’ll be throwing your money away.
With that in mind, one strategy is to place a buy stop order just above the neckline. In effect, by entering the first break of the neckline, you get to catch the upward momentum and ride the money train to the sky.
Unfortunately, it’s not all rainbows and unicorns with this bullish chart pattern. There’s a possibility of a false breakout where the right shoulder is lower than the left.
How to Conservatively Trade the Inverse Head and Shoulders Pattern
For those of you who like certainty, wait for the price to close above the neckline. In other words, you enter on the first close above the neckline.
In essence, this means you wait for confirmation that the breakout is valid and buy on the first close above the neckline.
Alternatively, you can place a limit order at or just below the broken neckline. This is an attempt to get executed at the price retracement to prevent slippage. However, you also run the risk of missing the trade if a pullback doesn’t happen.
Measuring Your Profits Using Bullish Chart Patterns
One trick we can use to predict profits is to measure the distance between the bottom of the head and the pattern’s neckline. We then use that same distance to project how far price may move in the breakout.
Let’s look at an example: Let’s say we have a ten-point distance between the head and neckline. Thus, we set the profit target ten points ABOVE the pattern’s neckline.
Like I mentioned above, if you’re an aggressive trader, place your stop-loss order below the breakout price bar or candle. Alternatively, if you’re a conservative trader like me, put your stop-loss order below the right shoulder.
If you’re interested to learn how to identify and trade bullish chart patterns like the inverse head and shoulder, watch our videos in our trading courses.
Are You Curious to Learn More Bullish Chart Patterns?
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