Description: Three successive peaks: middle is the lowest and the two outside higher and relatively equal in height. It forms after a downtrend and often signals upcoming trend reversal (from bearish to bullish).
Trade: Wait for pattern to complete and price to break out – to move above the neckline. The most common entry point is when a breakout occurs – the neckline is broken and a BUY trade is taken.
Example: COTI emerging of a Inverse Head and Shoulders
The inverse head and shoulders chart pattern is a bullish reversal pattern that is formed after a downtrend. It is characterized by a series of three lows, with the middle low being the deepest (the “head”), and the other two lows (the “shoulders”) being shallower and roughly equal in height. The pattern is completed when the price breaks above the neckline, which is a horizontal line drawn through the highs between the two shoulders.
The pattern is called “inverse” because it is the opposite of the traditional head and shoulders pattern, which is a bearish reversal pattern that is formed after an uptrend.
When the inverse head and shoulders pattern is formed, it signals that the downtrend is losing momentum and that buyers are starting to gain control. The pattern suggests that the price may be poised for a significant move to the upside.
Traders typically look for the following characteristics when identifying an inverse head and shoulders pattern:
The first shoulder should be formed after a downtrend and should be lower than the head.
The head should be the lowest point in the pattern.
The second shoulder should be formed after the head and should be roughly equal in height to the first shoulder.
The neckline should be drawn through the highs between the two shoulders.
The price should break above the neckline on increasing volume to confirm the pattern
