There are dozens of bullish chart patterns, not to mention dozens of ways to trade them. It can be overwhelming, from the inverse head and shoulder, double bottom, and triple bottom to the rounding bottom chart pattern. For today, I will keep it simple and talk about one: if you can learn to spot it, you can print money.
Inverse Head and Shoulders Pattern
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 peaks that comprise the left and right shoulders.
We see the inverted head and shoulder 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 to Find 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, the price falls to a trough and then rises.
- Second, the price fell below the previous trough, then rose again.
- Third, the price descended for the third time, but not as far as the second trough.
- Finally, the price heads upwards and breaks through the resistance at the top of the previous troughs.
The Importance of Volume
One thing that needs to be talked about is the volume in the head and shoulders pattern. Without volume confirmation, this pattern is NOT VALID.
In this bullish chart, volume generally follows the price higher on the left shoulder. However, buyers aren’t as aggressive as they once were if the heads formed on diminished volume.
Furthermore, if the right shoulder volume is lighter than the head on the last rallying attempt, buyers may have exhausted themselves.
Volume Confirming Bullish Chart Patterns
- An increase in volume should accompany the inverted left shoulder.
- The bullish inverted head must be made on a 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.
Trading Inverse Head and Shoulders
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.
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.
For those who like certainty, wait for the price to close above the neckline. In other words, you enter on the first close above the neckline.
Essentially, 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 risk missing the trade if a pullback doesn’t happen.
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 distance to project how far the 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.
As 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.
We all want to make money and minimize our losses when trading. Unfortunately, the road to trading profits has numerous twists, turns, and dead ends.
We must invest our time and money in the right education and community. Without the right team backing you, you won’t be successful.
