Educational | September 14, 2020

Trading inverse H&S

We often get asked about patterns that are included in our FX scanner. Now we are going to discuss the inverse H&S pattern in this article. This pattern suggests higher prices are likely.

What is the inverse H&S pattern? The name itself reveals half of the story, upside down to Head & Shoulder pattern. In technical analysis, we spot the inverse H&S pattern during the end of the current downturn. In contrast, we spot head & shoulder (H&S) during the end of an uptrend.

Pattern characteristics:

  • H&S: Head, Left, and right shoulder with a neckline.
    Head goes higher in the H&S pattern. The right shoulder roughly equal with the left shoulder (Bitcoin chart below) or some not.
  • Inverse H&S: Head, Left, and right shoulder with a neckline.
    The head goes lower to the left shoulder in an Inverse H&S pattern. And the right shoulder roughly equal to the left or sometimes not (EURUSD chart below).
    The left and right should roughly equal, or they can be uneven or Caddywhompus. This means the right shoulder can be shallower or more in-depth than the left shoulder.

  • Neckline: We start the head or the reaction high of the left shoulder and at the formation of the head or reaction high and the right shoulder’s start. You could draw a trendline across those two points. In addition to the right shoulder, the neckline also acts as a key driver to the pattern. The neckline can be at different angles. In the Bitcoin chart, the neckline is even, and on the EURUSD chart, it is uneven.

Until the price activity breaks the neckline and closing above, we do not confirm the inverse H&S pattern. See below the EURNZD chart.

If the price failed to break above the neckline, we call it a false pattern.

Calculating target price: The price difference between the head and low point at the neckline/ either shoulder.

H&S pattern

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It is important to always keep in mind the risks involved in trading with leveraged instruments.

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