The inverse head and shoulders (IHS) pattern is a bullish reversal formation signaling a potential trend change from downtrend to uptrend. It consists of three key components:
- Left Shoulder: Initial low followed by a minor rally.
- Head: Lower low (strongest downtrend momentum).
- Right Shoulder: Higher low resembling the left shoulder.
A neckline break confirms the pattern’s completion and triggers a buy signal.
Key Features of the IHS Pattern
Pattern Structure
- Left Shoulder: Forms after a downtrend, establishing initial support.
- Head: Price drops further, creating a new low.
- Right Shoulder: Price rebounds but stays above the head’s low.
- Neckline: Connects peaks between shoulders/head; breakout above it confirms bullish reversal.
Trading Signals
- Entry: Buy after neckline breakout closes above resistance.
- Stop Loss: Place below the right shoulder’s low.
- Price Target: Measured by distance from head to neckline, projected upward post-breakout.
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Trading Strategy
Step-by-Step Execution
Identify the Pattern:
- Look for three troughs in a downtrend (L-R-L).
- Ensure the head is the lowest point.
Confirm Volume:
- Rising volume on the right shoulder and breakout adds validity.
Neckline Break:
- Wait for candle close above neckline to avoid false breaks.
Risk Management:
- Stop loss: 2–3% below right shoulder.
- Take profit: 1:2 or 1:3 risk-reward ratio.
Common Pitfalls & Solutions
| Pitfall | Solution |
|---------|----------|
| False breakout | Confirm with volume & closing price. |
| Weak volume | Avoid trading; lack of buyer interest. |
| Uneven shoulders | Focus on neckline break, not symmetry. |
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Real-World Examples
Example 1: Successful IHS
- Context: Daily chart of XYZ stock.
- Breakout: Price surged 15% post-neckline break.
- Volume: Spiked during breakout.
Example 2: Failed Pattern
- Cause: Neckline rejected; price fell back into downtrend.
- Lesson: Always wait for confirmation.
FAQ
1. Is the IHS pattern reliable?
Yes, especially with high breakout volume and clear structure.
2. Can the neckline slope downward?
Yes, but upward-sloping necklines are stronger.
3. What’s the difference between IHS and double bottom?
IHS has three troughs; double bottom has two.
4. How long does the pattern take to form?
From weeks to months, depending on timeframe.
Final Tip: Combine IHS with other indicators (e.g., RSI, MACD) for higher-probability trades. Always backtest strategies!
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