Introduction
If you’re a trader or an investor, you’ve probably heard of the term “reverse head and shoulder”. This technical chart pattern is one of the most reliable indicators for predicting a bullish trend in the stock market. In this article, we’ll take a deep dive into the reverse head and shoulder pattern, its characteristics, and how to identify it.
What is a Reverse Head and Shoulder?
A reverse head and shoulder is a bullish reversal pattern that forms after a downtrend. It gets its name from its shape, which resembles a head and two shoulders. The pattern signals that the stock is likely to reverse its trend and start moving up. The pattern consists of three parts: the left shoulder, the head, and the right shoulder.
The Left Shoulder
The left shoulder is the first part of the pattern. It forms when the stock’s price falls to a new low and then rises again. The rise is usually not very strong and is followed by another drop to a new low.
The Head
The head is the second part of the pattern. It forms when the stock’s price falls again, but this time it falls to a lower low than the left shoulder. The price then rises again, but this time the rise is much stronger than the rise after the left shoulder.
The Right Shoulder
The right shoulder is the third and final part of the pattern. It forms when the stock’s price falls again, but this time it falls to a higher low than the head. The price then rises again, but this time the rise is weaker than the rise after the head.
How to Identify a Reverse Head and Shoulder?
Identifying a reverse head and shoulder pattern can be tricky. The pattern requires patience and a keen eye. Here are some characteristics to look for when identifying the pattern:
Volume
Volume is an important factor to consider when identifying a reverse head and shoulder pattern. Volume should decrease as the pattern forms, and then increase when the price breaks out of the pattern.
Neckline
The neckline is a trend line that connects the high points of the left and right shoulders. The neckline acts as a resistance level, and the price must break above it for the pattern to be confirmed.
Time Frame
The reverse head and shoulder pattern can form on any time frame, but it is more reliable on longer time frames. The longer the time frame, the more reliable the pattern.
Trading the Reverse Head and Shoulder
Once you’ve identified a reverse head and shoulder pattern, it’s time to trade it. Here are some tips to help you trade the pattern:
Entry
The best time to enter a trade is when the price breaks above the neckline. This confirms the pattern and signals a bullish trend.
Stop Loss
Place a stop loss below the right shoulder. This will protect you in case the pattern fails and the price drops.
Target
The target for the trade is the distance from the head to the neckline. Measure this distance and add it to the breakout point to find your target.
Conclusion
The reverse head and shoulder pattern is a reliable indicator for predicting a bullish trend in the stock market. Identifying the pattern can be tricky, but with patience and a keen eye, it’s possible. Trading the pattern requires discipline and risk management, but it can be highly profitable if done correctly.
