An inverse head and shoulders pattern is a bullish reversal chart pattern that forms at the end of a downtrend and signals a possible start of an uptrend. The inverse head and shoulders pattern has three troughs, and the middle trough (the head) is the lowest. The inverse head and shoulders pattern is confirmed when price closes above the neckline, the resistance level drawn through the two peaks between the troughs.
How traders use the inverse head and shoulders pattern is usually in three steps: 1. confirm the breakout with a close above the neckline, 2. enter a long position on the breakout or on a retest of the neckline, and 3. set a stop-loss below the right shoulder with a profit target equal to the pattern height.
What Is an Inverse Head and Shoulders Pattern?
An inverse head and shoulders pattern is a bullish reversal chart pattern that signals a downtrend may be ending and an uptrend may be starting. The inverse head and shoulders pattern has three troughs: the left shoulder, the head and the right shoulder, with the head as the lowest trough.
The inverse head and shoulders pattern is also known as the inverted head and shoulders, the reverse head and shoulders and the head and shoulders bottom. All four names describe the same chart pattern and follow the same trading rules.
The inverse head and shoulders pattern is the mirror image of the bearish head and shoulders pattern, which forms at the top of an uptrend. As a reversal pattern, the inverse head and shoulders pattern needs a clear downtrend before the left shoulder forms.
Is the Inverse Head and Shoulders Pattern Bullish or Bearish?
The inverse head and shoulders pattern is bullish. The inverse head and shoulders pattern starts inside a downtrend, which is bearish, and signals a shift to an uptrend once price closes above the neckline.
Before the breakout, three troughs are only a possible inverse head and shoulders pattern, and price can still continue the downtrend. Traders treat the inverse head and shoulders pattern as a bullish signal after the breakout above the neckline.
What Are the Parts of an Inverse Head and Shoulders Chart Pattern?
An inverse head and shoulders chart pattern has four parts, and each part gives traders a level to watch.
| Part | What it is | What to check |
|---|---|---|
| Left shoulder | The first trough, formed when price falls to a low inside the downtrend and then bounces | A clear downtrend comes before the left shoulder |
| Head | The second trough, lower than the left shoulder | The low of the head is the lowest point of the pattern and the base of the pattern height |
| Right shoulder | The third trough, higher than the head | The low of the right shoulder sits near the low of the left shoulder and stays above the head |
| Neckline | A resistance level drawn through the two peaks between the troughs | A candle close above the neckline is the breakout |
The two shoulders do not need to match exactly. A right shoulder that stays above the head is required, while shoulders at roughly the same level are preferred for a cleaner inverse head and shoulders pattern.
The neckline can be flat, slope upward or slope downward, depending on the levels of the two peaks. On a sloping neckline, the breakout level changes with every candle, so traders compare the breakout candle with the neckline value on that candle instead of the level of the first peak.
A downward-sloping neckline lets price break out at a lower level and gives an earlier entry, sometimes called a low cheat. An upward-sloping neckline places the breakout higher, so price must rise further from the right shoulder before the inverse head and shoulders pattern is confirmed.
| Important: Three troughs that form in a sideways range, without a downtrend before them, are an unreliable inverse head and shoulders pattern with a much higher chance of failing, so check the trend before you draw the neckline. |
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How Does the Inverse Head and Shoulders Pattern Form?
The inverse head and shoulders pattern forms in six stages, and each stage shows a change in price action and trader psychology as sellers lose control and buyers take over.
- Downtrend and left shoulder: Price falls to a new low inside the downtrend and then bounces. Sellers still control the market, and the bounce comes from traders who see the price as oversold.
- First peak: The bounce away from the left shoulder stalls and forms the first peak. The first peak is the first point of the neckline.
- Head: Price falls below the low of the left shoulder to the lowest point of the pattern. The new low can trigger panic selling, but buyers step in to form a price base or support level and push prices back up.
- Second peak: The rally from the head reaches a level close to the first peak and stalls again. The second peak is the second point of the neckline.
- Right shoulder: Price falls again and stops above the low of the head. The higher low shows that selling pressure has faded and buyers are creating a higher low.
- Breakout: Price rallies from the right shoulder, breaks out and closes above the neckline. Traders waiting on the sidelines to open long positions on breakout, and traders holding short positions have to buy to close these shorts, which adds to the existing buying pressure supporting the breakout.
After the breakout, the higher low at the right shoulder and the new high above the neckline give the first higher low and higher high of an uptrend.
Volume usually falls as price drops into the right shoulder and rises on the rallies away from the head and the right shoulder. Rising volume on the up-moves shows growing buying interest before the breakout.
How to Trade Inverse Head and Shoulders Pattern?
Trading the inverse head and shoulders pattern takes four decisions: how to confirm the breakout, where to enter the trade, where to place the stop-loss and where to set the profit target.
How to Confirm an Inverse Head and Shoulders Breakout
An inverse head and shoulders breakout is confirmed when a candle closes above the neckline on the trading timeframe. A candle that temporarily rises above the neckline during the session but closes back below the neckline does not confirm the breakout.
Traders also check volume on the breakout candle. An unusual amount of volume spike on the breakout candle, especially if it is suddenly more than the candles before it, suggests a confirmed breakout. However a breakout on low volume has a chance of turning into a false breakout.
One thing to note is that forex trading has no central exchange, so MT4 and MT5 show tick volume instead of trading volume. Tick volume is the number of price changes in each candle. Traders apply the same volume confirmation rule to tick volume when trading currency pairs, and on the daily chart the candle close that confirms the breakout is set by the broker's server time.
| Pro Tip: On MT4 and MT5, compare the tick volume of the breakout candle with the candles before the breakout, and wait for the breakout candle to close above the neckline before you open a long position. |
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Where to Enter an Inverse Head and Shoulders Trade
The first entry is a long position on the breakout, opened when a candle closes above the neckline. The breakout entry catches the move early, but the entry price sits further from the stop-loss, so the risk per trade is larger.
The second entry is called the retest entry, where a long position is placed only on the retest. After the breakout, price often returns to the neckline, which now acts as support, and traders buy when price holds above the neckline. The retest entry gives a better price and better confirmation, but not all breakouts retest, so a trader who waits only for the retest can miss a good trade entirely.
Traders who use a buy stop order above the neckline should expect slippage around major news releases. Spreads widen during news releases, and the buy stop order can fill above the order price.
Where to Place the Stop-Loss on an Inverse Head and Shoulders
The standard stop-loss for an inverse head and shoulders trade sits below the low of the right shoulder. A close below the low of the right shoulder cancels the inverse head and shoulders pattern, so a stop-loss at that level exits the trade where the pattern has failed.
A tighter stop-loss below the low of the breakout candle cuts the risk per trade. This tighter stop-loss is more likely to be hit by normal price swings, especially on lower timeframes so keep that in mind when trading.
Position size should be calculated from the stop-loss distance by dividing the amount you are willing to risk by the stop-loss distance in pips multiplied by the pip value, so a wider stop-loss gives a smaller position size.
How to Calculate the Inverse Head and Shoulders Pattern Target
The inverse head and shoulders pattern target uses the measured move method. Measure the pattern height, the vertical distance from the low of the head to the neckline, then add the pattern height to the neckline level at the breakout point.
| Profit target = Neckline Breakout Level + Pattern Height |
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The pattern height is the vertical distance from the head’s low to the neckline directly above it.
On a sloping neckline, measure the pattern height from the low of the head to the height of the head. The inverse head and shoulders pattern target is an estimate, and price can stop before the profit target or move well past the profit target.
Many traders take partial profits at the profit target and move the stop-loss up behind the rest of the position with a trailing stop. A trailing stop keeps part of the trade open if the new uptrend continues past the profit target.
Inverse Head and Shoulders Pattern Example
The USD/JPY daily chart below shows an inverse head and shoulders pattern that formed between December 2020 and January 2021. USD/JPY had been in a downtrend from above 108.00 in mid-2020 to the 103.00 area in December 2020.
USD/JPY daily chart with an inverse head and shoulders pattern, December 2020 to January 2021, with tick volume and RSI (14).
The levels below are read from the USD/JPY daily chart and rounded.
| Level | USD/JPY price (about) |
|---|---|
| Left shoulder low (mid-December 2020) | 102.90 |
| Head low (early January 2021) | 102.60 |
| Right shoulder low (late January 2021) | 103.35 |
| Neckline (rising slightly) | 103.80 to 103.95 |
| Breakout candle close (late January 2021) | 104.20 |
| Stop-loss (10 pips below the right shoulder low) | 103.25 |
| Pattern height (103.90 neckline above the head minus 102.60) | 130 pips |
| Profit target (103.90 neckline at the breakout + 130 pips) | 105.20 |
The USD/JPY breakout entry at 104.20 risked 95 pips to the stop-loss for a 100-pip gain to the profit target, a risk-reward ratio of about 1:1. On a $10,000 account risking 1% ($100), the position size is $100 / (95 pips × about $9.60 per pip per standard lot), or 0.10 lots.
USD/JPY reached the 105.20 profit target in early February 2021, about one week after the breakout. Price did not return to the neckline before reaching the profit target, so a trader waiting only for a retest entry missed the USD/JPY trade.
Tick volume rose on the rally away from the head, and RSI (14) climbed from the low 30s at the head to above 60 at the breakout. USD/JPY then kept rising to about 110.90 by late March 2021, around 570 pips above the profit target, which shows why traders keep part of the position open with a trailing stop.
Confirmation Rules: How to Confirm an Inverse Head and Shoulders Pattern?
Traders confirm the inverse head and shoulders pattern with other technical indicators, because the inverse head and shoulders pattern on its own produces false breakouts.
| Indicator | What to look for |
|---|---|
| RSI | Oversold readings near the head, then rising momentum on the breakout above the neckline |
| MACD | A bullish MACD crossover near the breakout, or bullish divergence while the troughs form |
| Moving averages | Price closing above a short-term moving average, or a short-term moving average crossing above a long-term moving average such as the 50-period and 200-period |
| Fibonacci retracement | Drawn from the start of the downtrend to the low of the head, the 50% and 61.8% levels can line up with the neckline or mark resistance levels after the breakout |
Indicators support what price shows on the chart. A bullish RSI or MACD reading without a close above the neckline does not confirm an inverse head and shoulders pattern.
What Is the Best Timeframe for the Inverse Head and Shoulders Pattern?
The inverse head and shoulders pattern works on any timeframe, from 5-minute charts to weekly charts. Day traders use 5-minute and 15-minute charts, swing traders use 1-hour and 4-hour charts, and position traders use daily and weekly charts.
The inverse head and shoulders pattern is generally more reliable on daily and weekly charts, because a higher timeframe holds more trading activity hence carry a stronger momentum when a pattern forms. On lower timeframes, spreads and commission take a larger share of a smaller pattern height, which lowers the risk-reward ratio of the trade.
Which Markets Can You Trade With the Inverse Head and Shoulders Pattern?
The inverse head and shoulders pattern appears in any market with enough trading activity to form clear troughs, including forex, stocks, indices, commodities and ETFs. The trading rules for the neckline, stop-loss and profit target stay the same in every market.
Volume data differs by market. Stocks and exchange-traded futures show exchange volume, while spot forex and CFDs on MT4 and MT5 show tick volume.
On TMGM, traders can apply the inverse head and shoulders pattern to forex pairs, indices, commodities and shares as CFDs through MT4, MT5 and the TMGM App, and can practise the trading rules on a demo account first. CFD trading involves significant risk and is not suitable for all investors. You could lose more than your initial deposit.
What Are the Strengths and Limitations of the Inverse Head and Shoulders Pattern?
Traders generally consider the inverse head and shoulders pattern a reliable bullish reversal pattern, but no chart pattern works every time. The strengths and limitations of the inverse head and shoulders pattern decide how much weight a trader gives each signal.
Strengths of the Inverse Head and Shoulders Pattern
- Clear trend reversal signal: A close above the neckline gives a defined point where the downtrend is likely over.
- Defined trade levels: The neckline, the low of the right shoulder and the pattern height set the entry, stop-loss and profit target before the trade opens.
- Volume confirmation: Rising volume on the breakout gives a second check on top of price.
- Works across timeframes and markets: The same inverse head and shoulders rules apply on intraday and weekly charts, in forex and in stocks.
Limitations of the Inverse Head and Shoulders Pattern
- False breakouts: Price can close above the neckline and then fall back below the neckline.
- Subjective identification: Two traders can draw the shoulders and the neckline at different levels, especially when the troughs are uneven.
- Volatility: Sharp moves around news releases can push price through the neckline and back within one candle.
- Wide stop-loss: The distance from the breakout to the low of the right shoulder can be large, which forces a smaller position size.
- Early entry: A long position opened before the right shoulder completes, or before a close above the neckline, trades an inverse head and shoulders pattern that may never form.
How to Avoid a False Breakout in an Inverse Head and Shoulders
A false breakout happens when price closes above the neckline and then falls back below the neckline, which traps traders who bought the breakout. Four rules lower the risk of trading a false breakout:
- Wait for a candle to close above the neckline on the trading timeframe.
- Check that volume on the breakout candle is higher than volume on the candles before the breakout.
- Consider entering on the retest, after the neckline holds as support.
- Set a stop-loss below the low of the right shoulder before entering the trade.
A close back below the neckline after the breakout is an early warning, and a close below the low of the right shoulder cancels the inverse head and shoulders pattern.
Inverse Head and Shoulders vs Head and Shoulders: What Is the Difference?
The inverse head and shoulders pattern and the head and shoulders pattern have the same structure turned upside down. The head and shoulders pattern is a bearish reversal pattern with three peaks at the top of an uptrend, while the inverse head and shoulders pattern is a bullish reversal pattern with three troughs at the bottom of a downtrend.
| Feature | Inverse head and shoulders | Head and shoulders |
|---|---|---|
| Signal | Bullish reversal | Bearish reversal |
| Trend before the pattern | Downtrend | Uptrend |
| Shape | Three troughs, head lowest | Three peaks, head highest |
| Neckline | Resistance through the two peaks | Support through the two troughs |
| Breakout | Close above the neckline | Close below the neckline |
| Trade | Long position | Short position |
| Stop-loss | Below the low of the right shoulder | Above the high of the right shoulder |
| Profit target | Pattern height added to the breakout point | Pattern height subtracted from the breakout point |
For the full trading rules on the bearish version, read our guide to the head and shoulders pattern.
Frequently Asked Questions
Is Inverse Head and Shoulders Bullish?
Yes, the inverse head and shoulders pattern is bullish. The inverse head and shoulders pattern signals a possible reversal from a downtrend to an uptrend, and the bullish signal is confirmed when price closes above the neckline.
What Does Inverse Head and Shoulders Mean?
Inverse head and shoulders means the head and shoulders shape turned upside down on a price chart: three troughs, with the lowest trough in the middle. In trading, an inverse head and shoulders pattern shows sellers losing control of a downtrend and buyers starting to push price higher.
Is an Inverted Head and Shoulders the Same as an Inverse Head and Shoulders?
Yes, the inverted head and shoulders and the inverse head and shoulders are the same chart pattern. Traders also call the inverse head and shoulders pattern the reverse head and shoulders or the head and shoulders bottom, and all four names use the same rules for the neckline, stop-loss and profit target.
