Now let’s take a look at an inverse head and shoulders formation. The name speaks for itself.
It is a head and shoulders formation, except this time it’s upside down.
A valley is formed (shoulder), followed by an even lower valley (head), and then another higher valley (shoulder).
These formations occur after extended downward movements.
Here you can see that this is just like a head and shoulders pattern, but it’s flipped upside down.
With this formation, we would place a long entry order above the neckline.
Our target is calculated just like the head and shoulders pattern.
Measure the distance between the head and the neckline, and that is approximately the distance that the price will move after it breaks the neckline.
You can see that the price moved up nicely after it broke the neckline.
If your target is hit, then be happy with your profits.
However, there are trade management techniques where you can lock in some of your profits and still keep your trade open in case the price continues to move your way.
You will learn about those in a later post.
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