Trading Inverse Head and Shoulders Patterns

What are inverse head and shoulders patterns?

Inverse head and shoulders patterns are bullish reversal patterns consisting of three consecutive troughs, with the middle trough (the head) dipping lower than the two lateral troughs (the shoulders).

This pattern illustrates a gradual shift in the balance of power between buyers and sellers, with the downward trend slowing down. The right shoulder forms when the downtrend weakens, and prices do not fall below the low established by the head.

In a typical downward trend, prices first drop to a low point before rebounding to a resistance level, forming the left shoulder. The downtrend resumes, creating a deeper low, which constitutes the head.

Prices then return to the first high point (resistance level) between the first two low points, called the neckline resistance level.

However, the downward trend loses steam and downward price momentum is blocked by the support level represented by the bottom of the first shoulder. A third and final trough draws the right shoulder.

The pattern’s bullish signal is confirmed when prices break through the neckline resistance level after forming the right shoulder.

The neckline is also crucial for calculating the theoretical upside price target, which is determined by measuring the distance from the head (the lowest point) to the neckline and adding this distance to the neckline breakout level.

The pattern and its bullish signal are invalidated if, after breaking the neckline resistance, prices fall back below the low of the right shoulder.

How to identify inverse head and shoulders patterns

Features	Explanations
Previous downtrend	Before the inverse head and shoulders pattern forms, prices follow a clear downward path, marked by lower lows and lower highs, reflecting a strong bearish trend.
Left shoulder	The first dip creates the left shoulder. It’s a temporary low, soon overtaken by another, more aggressive bearish push.
Head	The second and deepest dip forms the head, sinking below the previous low, and signaling the possible exhaustion of the downtrend.
Right shoulder	The final dip creates the right shoulder, roughly matching the depth of the left shoulder, indicating a possible bottoming out.
Primary support level	The lowest point of the pattern—the head—serves as the crucial support level, where buying interest starts to build.
Secondary support level	The two higher troughs (the shoulders) act as additional support levels, reinforcing the pattern’s structure.
Neckline (resistance level)	The two high points to either side of the head are the resistance level, referred to as the neckline.
Time scale	This pattern can unfold over any time frame, from minutes to weeks, making it adaptable to different trading strategies.
Volume	Watch for a surge in trading volume as prices approach the neckline; a breakout with strong volume often confirms the bullish reversal.

Steps for spotting inverse head and shoulders patterns:

1 – Start by identifying a clear downward trend in the market. This sets the stage for the potential reversal that the inverse head and shoulders pattern indicates.

2 – Keep an eye out for three consecutive dips, where the middle one (the head) falls lower than the other two (the shoulders). These shoulders should be roughly the same height.

3 – After the right shoulder forms, pay close attention as the price approaches the neckline—the line connecting the two peaks on either side of the head. When the price breaks above this neckline, it confirms the inverse head and shoulders pattern, signaling a potential buying opportunity.

How to trade inverse head and shoulders patterns

Traders usually bet that prices will continue to rise once they cross the neckline resistance level. A stop-loss order is placed below the support level represented by the shoulders’ low points, and a take-profit order is placed between the low point (the head) and the neckline resistance level.

Position	Buy
Position entry point	After prices cross the neckline resistance level
Stop-loss	Below the second shoulder’s low point
Take-Profit	Between the low point (the head) and the neckline resistance level

Example of an inverse head and shoulders pattern

In this example, DANONE’s share price draws an inverse head and shoulders pattern.

You see three troughs, with the middle one (the head, in purple) lower than the two smaller troughs to either side (the shoulders, in blue). Once the shape is formed, the downward trend ends, and a new upward trend emerges.

The probability of success for inverse head and shoulders patterns.

The inverse head and shoulders pattern is not a sure thing (far from it), and its presence alone is insufficient to provide traders with a significant statistical advantage. Therefore, inverse head and shoulders patterns should be interpreted more broadly.

Furthermore, the accuracy of inverse head and shoulders patterns is often imperfect. In fact, it is common to see the second shoulder slightly higher or lower than the first due to market noise.

Head and shoulders patterns: How do they differ from inverse head and shoulders patterns?

Head and shoulders patterns are the exact opposite of inverse head and shoulders patterns.

In other words, head and shoulders patterns are bearish reversal patterns consisting of three consecutive peaks with the middle peak (the head) rising higher than the two peaks to either side (the shoulders).

While inverse head and shoulders patterns send a buy signal at the end of a downtrend, head and shoulders patterns send a sell signal at the end of an uptrend. 

Inverse head and shoulders patterns are rarely perfectly geometric. Therefore, it can take a little time and practice to be able to identify them.

Consider using one of the best trading simulators to teach yourself to trade inverse head and shoulders patterns with no risk.