The inverse head and shoulders is the upside-down version of the head and shoulders. It forms at the bottom of a downtrend and signals that sellers are running out of steam. Three lows form, the middle one deepest, and a break above the line across the highs marks the turn.
What it looks like
- Left shoulder: the price falls to a low, then bounces.
- Head: the price falls to a lower low, then bounces again to around the same level.
- Right shoulder: the price dips again but holds above the head, then rises.
- Neckline: a line joining the two highs between the lows.
The pattern completes on a close above the neckline. The first sign it is forming is the right shoulder: a higher low after a long run of lower lows.
The role of volume
Volume matters more for bottoms than for tops. Markets can fall on their own weight, but they need buyers to rise. Look for a clear rise in volume on the rally from the right shoulder and on the break of the neckline. A breakout on light volume is more likely to fail.
How to trade an inverse head and shoulders
- Entry: buy on a close above the neckline, or on a pullback that tests the neckline from above.
- Stop: below the right shoulder.
- Target: measure from the bottom of the head up to the neckline and add that distance to the breakout point.
Mistakes to avoid
- Buying the right shoulder before the neckline breaks.
- Calling every bounce a shoulder. You need a clear downtrend first and a sensible, roughly balanced shape.
- Using a stop below the head. It is much further away, which makes the trade far riskier for the same target.
Related guides
This guide is for education only and is not financial advice. Trading carries risk; you can lose more than you expect.