This is exactly like the Head and Shoulders only reversed. It occurs after a long extended downtrend.
It shows that sellers are getting exhausted and the price are very low.
As price falls, it reaches a certain level, bounces up forming the first shoulder and then falls again but slightly lower than the first low, bounces back up again (head) to test the same level and falls back. This time it holds on the same level as the first one and bounces strongly upwards for the last shoulder.
This same zone of where price pauses when it bounces up is a resistance zone that forms the neckline. This shows the exhaustion of sellers and a probable reversal of the trend putting the buyers at an advantage i.e Buy signals
The pattern is completed after the break and close of the candle above the neckline. This confirms the Buy signal.
The Stop loss is set just below the Right shoulder. The target is got by measuring the vertical distance from the head to the neckline and projecting that same distance upwards from neckline.
Let’s see some examples how you can make money from trading an inverse of head and shoulders.
This an Inverse Head&Shoulders pattern on AUDCHF, Daily chart below;
Like we said before, the inverse head and shoulders is a reversal pattern that occurs after a downtrend and gives possible buying opportunities.
So from the chart above, the confirmation for the Buy entry is the break and close of bullish candle above the Neckline as shown. Stop loss is set just below the right shoulder and target measured and set as shown above i.e measuring vertical distance H from Head to Neckline and projecting that same distance H upwards as the profit Target as shown above.
Below is a GOLD, 30 minute chart.
From the Gold chart above, The confirmation for the Buy entry too is the break and close of bullish candle above the Neckline as shown .
Stop loss is set just below the right shoulder and target measured and set as shown above i.e measuring vertical distance (90 pips) from Head to Neckline and projecting that same distance (90 pips) upwards as the profit Target as shown above.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...