Every trader’s goal is to buy low and sell high, but only a few people can muster the courage to buy against the trend when the downtrend is reversed.
When prices fall, emotions are negative and fear is at an extreme level, but at this time, an inverse head and shoulders (IHS) pattern may appear.
(IHS) The shape is similar in structure to the conventional H&S top shape, but the shape is inverted. After completion, the (IHS) pattern marks the end of the downtrend and the beginning of a new uptrend.
Inverted head and shoulders foundation
(IHS) mode is a reversal setting formed after a downtrend. It has a head, a left shoulder, and a right shoulder, which are placed upside down under the neckline. Break and close above the neckline to complete the setting, indicating that the downward trend has been reversed.
As shown above, the asset is in a downward trend, but after a sharp drop, value buyers believe that the price has reached an attractive level and will begin to bottom. When demand exceeds supply, assets form the first trough from the left shoulder, and prices begin to rebound.
In a downtrend, traders sell rallies. The shorts actively sold after the correction, and the price fell below the first low and made a lower low. However, the bears cannot take advantage of this weakness and resume the downtrend. The bulls bought on dips and began a relief rebound, forming the head of the pattern. As prices approached the previous peak where the rebound stalled, the bears stepped in again.
This began to fall and eventually formed the third trough. As buyers expected to improve and actively buy, the third trough was almost the same as the first trough. This forms the right shoulder of the setting. The price rose and this time, the bulls managed to push the price above the neckline to complete the pattern.
The neckline has since become a new bottom, as traders bought this support level on dips. This marks the beginning of a new upward trend.
Use (IHS) patterns to identify new upward trends
Bitcoin (Bitcoin) It has been in a downward trend since the local top of USD 13,970 was formed on June 26, 2019. Buyers stepped in and prevented the decline in the USD 7,000 to USD 6,500 support area, forming the left shoulder of the (IHS) pattern. This started a relief rebound, pushing the price to $10,450. At this level, short-term longs have taken profits, and shorts have begun short positions in order to resume the downtrend.
The aggressive selling broke the $6,500 support level and Bitcoin/Tether (USDT) The currency pair plummeted to 3,782.13 USD on March 13, 2020. The bulls saw this fall as a buying opportunity and began a strong relief rally, with the price approaching $10,450. The second groove forms the head of the device.
The right shoulder is shallow, because the selling pressure is reduced and the bulls did not wait for a deeper correction to buy. Finally, the bulls pushed the price above the neckline on July 27, completing the (IHS) pattern.
The bears tried to trap the bulls, and they pulled the price back to the neckline. Although the price was slightly below the neckline, traders did not keep the currency pair below $10,000. This shows that the mood has changed. As buyers pushed prices above $12,500, the bullish momentum picked up.
How to calculate the model target set by IHS
To calculate the minimum target target of the (IHS) form, calculate the depth from the neckline to the lowest point to form the head. In the example above, the neckline is approximately $10,450, minus the lowest point of $3,782.13, and the depth is $6,667.87.
Then add this value to the breakout level, which in the example above is close to $10,550. This gives a target goal of 17,217.87 USD. When the trend turns from downward to upward, the target may not be reached or exceeded. Therefore, traders should be guided by goals and don’t sell positions just because they have reached a level.
Be patient, because sometimes the model fails
There is no pattern that succeeds at every breakout, and traders should wait for the setting to be completed before starting a trade. Sometimes, the morphological structure is formed, but the breakthrough does not occur. The trader who completed the preemption pattern and started trading is trapped.
For example, Chainlink’s Associate It reached $4.58 on June 29, 2019, and began to pull back. Buyers are trying to prevent a decline in the $2.20 to $2.00 area. As shown in the figure above, this forms a head and two shoulders (IHS) pattern.
Although the price reached the neckline on August 19, 2019, buyers were unable to push the price higher. Therefore, the pattern is not completed and the buy signal is not triggered.
The LINK/USDT currency pair fell from the neckline and fell below the set top 1.96 US dollars, invalidating the pattern. This puts traders who might buy when the expected trend reversal is trapped.
The (IHS) pattern may be a useful tool for traders to jump at the beginning of a new uptrend. There are some important points to keep in mind when using this setting.
Before starting any long positions, traders should wait for the pattern to complete, which occurs after the price breaks and closes above the neckline. Compared to a breakout that occurs on a low volume, a breach of the neckline (above-average volume) is more likely to lead to a new uptrend.
When the trend reverses, it usually lasts for a long time. Therefore, traders should not rush to sell their positions just because they have reached the target of the model. At other times, the pattern was completed but quickly reversed direction and prices plummeted. Traders should pay close attention to other indicators and price trends before establishing a position.
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