What is Inverted Head and Shoulder in Forex Trading?

The inverted head and shoulder is reversal candlestick pattern, which is formed when sentiments producing the downtrends possibly shifting and selling pressure is decreasing. The inverted head and shoulder pattern is formed when price meets the following characteristics.

• The price of currency or security falls to form a trough and then rise to form a peak
• The price fall again to form 2^nd trough but below the level of 1^st trough
• Price rise again to the level of 1^st peak and fall again to form the 3^rd trough but just to the level of 2^nd trough
• The 1^st and 2^nd trough are called shoulder and 3^rd is called head. The line that join the peak level of 1^st and 3^rd trough is called neckline.

The inverted head and shoulder pattern upon its completion signify bullish trend. Most of forex traders usually enter in long tern position when price move above the neckline, because it indicate a major breakout.

There are two main strategies that traders usually use in inverted head and shoulder pattern.

• Aggressive – the user of this strategy place buy stop order just above the neckline of inverted head and shoulder pattern. This ensure the traders that your trade will be active on the 1^st breakout of resistance. The main disadvantage of this strategy is that any false breakout may result in extensive loss due to opposite market momentum.
• Effective – the user of this strategy wait for the price of security or currency to close above the neckline. This is confirmation that breakout is not false but valid.