# Understanding the Inverse Head and Shoulders Pattern: A Key to Trading Reversals

![Inverse Head and Shoulders](https://www.investopedia.com/thmb/DPUTh5Tb9wvUJGWpBtDZmR0CNBQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/inverse-head-and-shoulders-4194370-1-4cbe97fa488942a79e874221dcc6d8ab.jpg)

*— Investopedia / Joules Garcia*

> **Definition**
>
> The inverse head-and-shoulders pattern is a major reversal signal that forms at the end of a downtrend. It has three successive troughs, with the middle trough being the deepest.

The inverse head and shoulders pattern is a powerful indicator for predicting bullish reversals in trading from bearish trends. The structure of the pattern consists of three troughs: one lower "head" and two higher "shoulders." The pattern signals a potential shift from a bearish to a bullish trend when the price breaks above the "neckline." Traders use the inverse head and shoulders pattern to identify and establish optimal entry points for positions.

Traders usually use other technical indicators in conjunction with the inverse head and shoulders to confirm their view of a reversal. These can include the [moving average](https://www.investopedia.com/terms/m/movingaverage.asp), the [Relative Strength Index (RSI)](https://www.investopedia.com/terms/r/rsi.asp), and the [Moving Average Convergence Divergence (MACD)](https://www.investopedia.com/terms/m/macd.asp).

### Key Takeaways

*   The inverse head and shoulders pattern is a classic reversal pattern used in technical analysis to predict a shift from a bearish trend to a bullish trend, signaling a potential buying opportunity.
*   Volume plays a crucial role in confirming the validity of the pattern, with increased volume during the breakout above the neckline serving as a strong indicator of a successful bullish reversal.
*   Traders can enhance the reliability of the inverse head and shoulders pattern by combining it with other technical indicators such as moving averages, the Relative Strength Index (RSI), and the Moving Average Convergence Divergence (MACD).
*   Understanding the psychology of the inverse head and shoulders pattern is important, as it reflects the shift in market sentiment from bearish to bullish, driven by emotional biases and herd behavior among investors.
*   False breakouts can occur, highlighting the importance of additional confirmation and risk management strategies, such as setting stop-loss orders to protect against potential losses.

## Understanding the Inverse Head and Shoulders Chart Pattern

This chart pattern formation is commonly used in technical analysis to predict the reversal of a downtrend. It is a bullish signal that is essentially the reverse of the regular head and shoulders chart pattern, which is a bearish indicator. The structure of the inverse head and shoulders chart pattern is described as follows:

*   **Left Shoulder**: After a downtrend, the price of the respective asset makes a low and then rallies to a higher point, forming the left shoulder.
*   **Head**: Following the formation of the left shoulder, the price declines to a point lower than the left shoulder and then rallies again, forming the head.
*   **Right Shoulder**: Finally, the price declines again but not as low as the previous decline or the head, and then [rallies](https://www.investopedia.com/terms/r/rally.asp) one more time, forming the right shoulder. The right shoulder is typically roughly equal in depth to the left shoulder.
*   **Neckline**: A trendline is drawn connecting the high points (or "peaks") after the formation of each shoulder and the head. This line serves as a level of resistance that the price must break through to confirm the pattern.

![Image 1](https://www.investopedia.com/thmb/xPcvVKpLSqmflo4WkhJ35-ONSEY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Inverse_Head_And_Shoulders_Definition_Feb_2020-01-97f223a0a4224c2f8d303e84f4725a39.jpg)

**

## Trader Psychology Behind the Inverse Head and Shoulders Pattern

The psychology behind the formation of the inverse head and shoulders pattern can be understood through the changing [sentiment](https://www.investopedia.com/terms/m/marketsentiment.asp) among traders and investors during its development.

On the left shoulder, the overall sentiment is pessimistic. The sellers are still in control. Then, a minor rally begins to occur as some traders think the security is [oversold](https://www.investopedia.com/terms/o/oversold.asp). However, this rally is short-lived as the dominant sentiment is still bearish.

Next, with the formation of the head of the inverse head and shoulders pattern, the sentiment moves from extremely pessimistic to cautiously optimistic. The price of the respective asset drops even lower than the left shoulder, indicating strong selling pressure. The drop to a new low may trigger panic selling. However, this extreme point often attracts bargain hunters who consider the asset significantly undervalued, leading to a rally.

The right shoulder now begins to form. The sentiment is cautiously optimistic. The price declines again but not to the lows of the head, indicating waning selling pressure and possible [accumulation](https://www.investopedia.com/terms/a/accumulation.asp). The shallower low suggests that sellers are losing steam and buyers are starting to gain confidence. The sentiment starts to shift from bearish to bullish.

Finally, with the breaking of the neckline, optimism turns into bullishness. The price breaks above the neckline, often on higher volume. The break above the neckline confirms the bullish reversal, leading to more traders who had previously been on the sidelines stepping into the market. This often fuels a strong upward move.

Understanding trader psychology is crucial in technical analysis. [Behavioral finance](https://www.investopedia.com/terms/b/behavioralfinance.asp) studies suggest that chart patterns like the inverse head and shoulders can be explained by [cognitive biases](https://www.investopedia.com/articles/investing/051613/behavioral-bias-cognitive-vs-emotional-bias-investing.asp) such as herd behavior and representativeness heuristics.

## How to Trade the Inverse Head and Shoulders Pattern

Trading the inverse head and shoulders pattern involves several key steps, each requiring careful consideration. Here is a guideline on how to trade this chart pattern:

**Identification**:

*   **First Step**: The trader should identify the pattern formation on the chart, which includes a left shoulder, a head, and a right shoulder. A point to note is to ensure that the pattern follows a downtrend. For a reversal to occur, there must be something to reverse.

**Confirmation**:

*   **Neckline**: The trader should then draw a [trendline](https://www.investopedia.com/terms/t/trendline.asp) connecting the peak of each shoulder and the head.
*   **Volume:** If [volume](https://www.investopedia.com/ask/answers/041015/why-trading-volume-important-investors.asp) data is available, traders should look for increased volume during the [breakout](https://www.investopedia.com/terms/b/breakout.asp) above the neckline as confirmation.

**Entry**:

*   **Buy Signal**: Traders might enter a long position when the price breaks above the neckline, preferably on high volume, or when it retests the neckline.

**Risk Management**:

*   **Stop Loss**: To manage [risks](https://www.investopedia.com/terms/r/risk.asp) such as losses, traders should place a stop loss order just below the right shoulder or neckline.
*   **Position Sizing**: The trader should also determine the size of the trade based on their [risk tolerance](https://www.investopedia.com/articles/pf/07/risk_tolerance.asp) and the distance between the entry point and the stop loss.

**Profit Target:**

*   **Target Price**: The trader should calculate the target price by measuring the vertical distance from the neckline to the lowest point of the head. This value will be added to the distance at the breakout point at the neckline.

**Exit:**

*   **Take Profit**: The trader should exit the position when the price reaches the target level or shows signs of reversing.
*   **Trailing Stop**: Alternatively, the trader could use a [trailing stop](https://www.investopedia.com/terms/t/trailingstop.asp) to capture additional gains while protecting their position.

**Additional Considerations:**

*   **Confirmation Indicators**: Traders could use technical indicators like the RSI or MACD for additional confirmation on the inverse head and shoulders chart pattern.
*   **Time Frame**: The chart pattern is generally more reliable on longer time frames like daily or weekly charts.

## Real-World Inverse Head and Shoulders Pattern Example

On a 15-minute chart spanning from July 19th at 11:15 to August 24th at 10:00, the [Invesco QQQ Trust Series (QQQ)](https://www.investopedia.com/ask/answers/061715/what-qqq-etf.asp) showcased the inverse head and shoulders chart pattern following an 8.57% decline from a higher of $387.98 to a low of $354.76.

The pattern's right shoulder was marked by lower highs at $365.94 and $3263.03, bottoming out at $360.68. The head was distinctly formed at a low of $354.70. Subsequently, the [ETF](https://www.investopedia.com/terms/e/etf.asp) rallied to a high of $362.59, constituting the the top of the right shoulder, which had a low point at $359.17.

The critical neckline was delineated by lower highs of $354.76 and $354.70. On August 21st at 13:15, QQQ broke above this neckline, setting a bullish target of $370.66. This target was subsequently met with a rally on August 24th at 9:30.

![Inverse Head and Shoulders Pattern on QQQ on 15 Minute Chart](https://www.investopedia.com/thmb/g2EKOm-WaIyI9ToWv5ZFO01Owjc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/QQQ_2023-09-19_13-52-36-8fb31b3b6c51457c98d6d9f20c6aa8fc.png)

*Inverse Head and Shoulders Pattern on QQQ on 15 Minute Chart. — Tradingview*

## Importance of Volume in Confirming Inverse Head and Shoulders

Volume plays a critical role in confirming the validity and strength of an inverse head and shoulders pattern.

During the formation of the left shoulder, volume generally decreases as the left shoulder forms, reflecting waning selling pressure. For the head of the inverse head and shoulders chart pattern, volume may spike at the low point of the head as panic selling ensues, but it often picks up again during the subsequent rally, indicating renewed buying interest. For the right shoulder, volume is usually lower compared to the head, signaling that selling pressure is diminishing.

During the breakout of the neckline, a significant increase in volume as the price breaks above the neckline is a strong confirmation signal. It indicates that the market participants are in agreement about the asset's bullish prospects. High volume during the breakout suggests that the upward trend is more likely to be sustained, as it shows strong buyer commitment.

There are several reasons why volume matters in the case of an inverse head and shoulders chart pattern. One reason is the confirmation of the chart pattern. High volume confirms that the pattern is not a false breakout, thereby increasing the reliability of the trade signal.

Another reason why volume matters is from the perspective of [momentum](https://www.investopedia.com/terms/m/momentum.asp). A volume supported breakout often leads to a stronger and more rapid price movement, making it easier to reach the profit target.

Finally, volume can help with [risk management](https://www.investopedia.com/terms/r/riskmanagement.asp). Low volume during a breakout can be a red flag, signaling that the pattern may not be as reliable, which can aid in risk assessment.

Volume is often considered an essential second dimension to price in technical analysis. Studies in market microstructure theory suggest that volume contains information about traders' beliefs and intentions, making it a valuable tool for confirming chart patterns.

## Understanding False Breakouts in Inverse Head and Shoulders

False breakouts in the context of the inverse head and shoulders pattern can have significant implications for traders. A false breakout occurs when the price moves above the neckline but quickly reverses, failing to sustain the upward momentum.

Traders who enter long positions based on the initial breakout may incur losses if the breakout turns out to be false. These false breakouts can shake investor confidence and can lead to emotional decision making, such as premature exits or disregarding stop loss levels.

Also, a false breakout may indicate that the asset is not yet ready for a bullish reversal, suggesting that the bearish sentiment still prevails. Moreover, the occurrence of a false breakout often necessitates a re-evaluation of one's trading strategy, including risk management techniques.

## Strategies to Avoid False Breakouts in Inverse Head and Shoulders

There are several ways to mitigate the risks of false breakouts in the inverse head and shoulders chart pattern. One way is volume confirmation. Traders should look for high trading volume during the breakout of the neckline as a confirmation signal on the discussed chart pattern.

Another type of confirmation is waiting for the price to close above the neckline and even retest it as support before entering a trade. Additionally, traders would employ technical analysis indicators like the RSI or MACD for further confirmation.

Finally, traders should set stop-loss orders to manage their downside risk, especially when trading on these pattern breakouts.

## The Role of Neckline Testing in Inverse Head and Shoulders

The testing of the neckline in an inverse head and shoulders pattern is a crucial phase that can offer valuable insights into the pattern's reliability and the market's sentiment on the respective asset.

After breaking above the neckline, the price often retraces back to the neckline level, testing it as new support before resuming the upward trend. A successful retest of the neckline strengthens the validity of the pattern and provides additional confirmation for a bullish reversal.

Also, the retest offers a secondary entry point for traders who missed the initial breakout, often with a tighter stop loss order, thus reducing risk. Another significance of the testing of the neckline is market sentiment. A successful retest indicates that market sentiment on the asset has shifted from bearish to bullish, as the previous resistance level (neckline) now acts as support.

Finally, if the price fails to hold the neckline and falls below it, a false breakout could be signaled, necessitating a strategy re-evaluation.

## Setting Profit Targets with the Inverse Head and Shoulders Pattern

Profit targets in an inverse head and shoulders pattern are typically targeted using the vertical distance between the neckline and the lowest point of the head. This distance is known as the price objective and serves as a guidance for potential upward movement after the breakout.

The profit target of the inverse head and shoulders is measured by calculating the vertical distance from the neckline to the lowest point of the head in the pattern. This distance is added to the point where the price breaks above the neckline during the breakout.

Traders find it crucial to know the profit target of this chart pattern. It helps in assessing the risk-reward ratio of the trade, aiding in decision making. It also offers a logical exit point for taking profits, sidelining emotions in trading. Moreover, the profit target can be aligned with other trading objectives and strategies, such as trailing stops, to maximize gains.

## Enhancing Inverse Head and Shoulders with Additional Indicators

Combining the inverse head and shoulders pattern with other technical analysis indicators is likely to enhance the reliability of the trading signals. Some commonly used indicators that traders consider are as follows:

**Moving Averages:**

*   **Purpose**: To identify the overall trend direction.
*   **How to Use**: A crossover of a short-term moving average over a long-term moving average can confirm a bullish reversal.

**RSI:**

*   **Purpose**: To gauge overbought or oversold conditions.
*   **How to Use**: An RSI value above 70 may confirm the bullish momentum, especially if it coincides with the neckline breakout.

**MACD:**

*   **Purpose**: To help identify momentum and trend direction.
*   **How to Use**: A bullish MACD crossover can serve as an additional confirmation signal.

**Volume Oscillator**:

*   **Purpose**: To help confirm the strength of the trend based on volume.
*   **How to Use**: A rising volume oscillator can confirm the bullish breakout, adding credibility to the pattern.

**Fibonacci Retracement**:

*   **Purpose**: To help identify potential support and resistance levels.
*   **How to Use**: The 50% or 61.8% retracement levels can act as additional confirmation points or targets.

**Bollinger Bands**:

*   **Purpose**: To measure volatility and potential reversals.
*   **How to Use**: A price movement that touches the upper Bollinger Band can confirm the bullish trend.

**Stochastic Oscillator:**

*   **Purpose**: To help identify overbought or oversold conditions.
*   **How to Use**: Generally, a stochastic value above 80 can confirm bullish momentum.

## What are Some Technical Analysis Chart Patterns?

Technical analysis employs a variety of chart patterns to analyze price movements and predict future trends. Some reversal patterns include the head and shoulders and inverse head and shoulders, the double top and double bottom and the triple top and triple bottom.

  

Some continuations patterns include flags and pennants, triangles and rectangles. Also, some momentum patterns include the cup and handle as well as wedges. Finally some candlestick chart patterns include the doji, hammer or hanging man and the bullish and bearish engulfing patterns.

## What are the Assets than can be Used with the Inverse Head and Shoulders Chart Patterns?

The inverse head and shoulders chart pattern is a versatile tool that can be applied to a variety of financial asset classes. These include equities, commodities, forex, fixed income, ETFs and mutual funds, futures, options and REITs.

## What is the Best Timeframe for the Inverse Head and Shoulders Pattern?

The best timeframe largely depends on the trader's investment objectives. Day traders may tend to use intraday charts such as the 1-minute, 5-minute or 15-minute charts. Swing traders trend to use hourly charts. Position traders and long term investors would tend to focus on daily, weekly or monthly timeframes.

## The Bottom Line

The inverse head and shoulders pattern is a bullish reversal indicator that helps traders and investors predict shifts from a bearish to a bullish trend. Typically, it's not used on its own; traders seek technical confirmation from other indicators such as moving averages, the MACD, RSI, and volume oscillators. Once you understand the pattern's structure, it's also important to apply disciplined trading rules to effectively manage risk and leverage potential trading opportunities. The pattern's versatility across different asset classes and timeframes makes it valuable for short-term and long-term traders and investors.

> **Article Sources**
>
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>     
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