Introduction
Head and Shoulders Bottom Formation is a popular technical analysis pattern that is used to predict the reversal of a downtrend in the stock market. This pattern is also known as “Inverse Head and Shoulders” as it is the opposite of the traditional “Head and Shoulders” pattern. In this article, we will discuss the Head and Shoulders Bottom Formation in detail, including its definition, characteristics, and how to trade it.
What is the Head and Shoulders Bottom Formation?
The Head and Shoulders Bottom Formation is a bullish reversal pattern that is formed after a prolonged downtrend in the market. It is characterized by three distinct troughs, with the central trough being the deepest and the two outer troughs being shallower. The central trough is known as the “head,” while the two outer troughs are called the “shoulders.”
Characteristics of the Head and Shoulders Bottom Formation
The following are some of the key characteristics of the Head and Shoulders Bottom Formation:
- There are three troughs, with the central trough being the deepest.
- The two outer troughs are shallower than the central trough.
- The middle trough (head) is lower than the two outer troughs (shoulders).
- The pattern is formed after a prolonged downtrend.
- The formation is completed when the price breaks above the neckline.
How to Trade the Head and Shoulders Bottom Formation
Trading the Head and Shoulders Bottom Formation involves identifying the pattern and waiting for the price to break above the neckline. The neckline is drawn by connecting the two high points that form between the shoulders and the head. Once the price breaks above the neckline, traders can enter a long position and place a stop loss below the neckline.
Target Price
The target price for the Head and Shoulders Bottom Formation is calculated by measuring the distance from the neckline to the head and adding it to the breakout point. This gives traders an idea of how much the price is likely to rise after the pattern is completed.
False Breakouts
It is important to note that false breakouts can occur with the Head and Shoulders Bottom Formation. Traders should wait for confirmation of the breakout before entering a long position. Confirmation can be in the form of a strong bullish candlestick pattern or an increase in trading volume.
Conclusion
In conclusion, the Head and Shoulders Bottom Formation is a powerful bullish reversal pattern that is formed after a prolonged downtrend in the market. Trading this pattern involves identifying the formation, waiting for the price to break above the neckline, and placing a stop loss below the neckline. Traders should always wait for confirmation of the breakout and be aware of false breakouts.
