Worth_The_Ri5k

Cheatsheet: Understanding the Inverse Head & Shoulders Pattern

Long
FOREXCOM:XAUUSD   Gold Spot / U.S. Dollar
The Inverse Head & Shoulders Patterns is one of the most well known chart patterns and has a higher success rate then most (success rate, is that rate at which the pattern hits its target; the "measured move").

The pattern can be seen as a potential sign that a momentum reversal is coming into play with the last part of the pattern: the right "Shoulder" showing the market structure printing a Higher Low (HL), in up trending markets the price continually shows higher lows so this pattern is a potential way of spotting a initial HL before a uptrend begins.

Here are the main characteristics in which to identify a Inverse Head & Shoulders Pattern:

VOLUME MIMICS PATTERN
• 3 VALLEYS, LEFT & RIGHT SIMILAR HEIGHT WITH MIDDLE DEEPEST
• TRIANGULAR IN APPEARANCE
• FOUND AFTER STRONG DOWNTREND
• HIGH SUCCESS RATE
• CAN BE SLANTED
• HIGH VOLUME ON BREAKOUT INCREASE SUCCESS CHANCES

Price forms 3 distinct valleys after a strong downtrend, the left and right valley should have a similar height (shoulders), the middle valley (head) has to be the deepest or this can not be a IHS pattern . They should seem triangular in appearance but as long as it fits the main characteristics can still be a valid pattern as sometimes they look "messy" on the smaller timeframes but valid on higher timeframes. Volume should also paint the same pattern with the 3 valleys, strong volume on breakout increases success rate.

As with any pattern you want to try buy on top of long term support areas not beneath to increase success chances.
( If you want to understand what potential support areas can be, visit the below linked idea on Order zones.)

The right shoulder should form a higher low (HL) which is a early sign of trend change, this is entry A, with entry B (riskier) being the bullish retest of of the “neckline”. The idea is to gain an early entry on the pattern at point A to maximize profits and reduce risk. Once price moves below the middle "valley" it is likely that the pattern is not valid anymore so this allows us to get a tight stop loss upon entry at "A". If you were to buy at B instead of A, you have a larger distance to the INVALIDATION point of the pattern which is not ideal.

We measure the height of the pattern and add it to the breakout level for a maximum possible price target. On some markets these patterns hit targets as high as 70% of the time.

In this example on Gold the pattern as not fully formed yet so is still not validated, plus we are also under a important resistance area so we would need to clear that first. If that happens we have the chance

Learning to trade patterns such as these can provide great opportunities if you understand price action and how to identify the key areas of the pattern that other traders and investors may be focusing on too, these areas become important psychological levels on the chart.

Thank you traders, if you found the idea informative you can show your appreciation by Liking & Commenting! If you want to learn about the bearish version of this pattern, the Head & Shoulders , then visit this idea (Click:)

Comment: Gold still looking strong
Comment: For those following the Gold analysis from earlier i posted about the Inverse Head & Shoulders pattern earlier it broke out now we are at a important level, no bounce here = more downside coming on gold.

Comment: We are at point B of the image.

If Gold can bounce here, we can see it increase in value once again.
Comment:

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