Reverse Head and shoulder pattern Analysis

 

The reverse head and shoulders pattern is a bullish reversal pattern that often signals the end of a downtrend and the beginning of an uptrend. It is characterized by three distinct troughs with the middle trough (the head) being the lowest and the two outside troughs (the shoulders) being higher and approximately equal in height. Here’s a detailed breakdown of the pattern and how to trade it:

Components of the Reverse Head and Shoulders Pattern

1. Left Shoulder: The price declines to a trough and then rises to form a peak.
2. Head: The price declines again to form a lower trough than the left shoulder and then rises again.
3. Right Shoulder: The price declines again but not as low as the head, forming the right shoulder, and then rises again.
4. Neckline: The resistance line formed by connecting the peaks of the left shoulder and the right shoulder.

Identification and Confirmation

1. Formation of Troughs and Peaks:

   • Identify the left shoulder, head, and right shoulder.
   • The head should be the lowest point, with the shoulders being higher and roughly equal in height.

2. Neckline:

   • Draw the neckline by connecting the peaks after the left shoulder and the head, and extend this line to the right.
   • The neckline can be horizontal or sloped.

3. Volume:

   • Volume typically decreases during the formation of the pattern.
   • Volume should increase significantly on the breakout above the neckline, confirming the pattern.

Trading Strategy

1. Entry Point:

   • Enter a long position when the price breaks above the neckline with increased volume.

2. Stop Loss:

   • Place a stop loss below the right shoulder to limit potential losses.

3. Target Price:

   • Measure the distance from the neckline to the bottom of the head and add this distance to the breakout point above the neckline to estimate the target price.