Professional traders look for this classic pattern to spot Bitcoin price reversals – CVBJ
Every trader aims to buy low and sell high, but only a select few are able to muster the courage to go against the pack and buy when the downtrend changes direction.
When prices are falling, sentiment is negative and fear is at extreme levels, but it is at times like these that the reverse head and shoulders (IHS) pattern can appear.
The pattern (IHS) is similar in construction to H & S’s regular upper pattern, but the formation is reversed. Upon completion, the (IHS) pattern signals the end of the downtrend and the beginning of a new uptrend.
Reverse head and shoulders basics
The pattern (IHS) is a reversal setup that forms after a downtrend. It has a head, a left shoulder, and a right shoulder that are turned upside down and placed below a neckline. A breakout and close above the neckline completes the setup, indicating that the downtrend has reversed.
Lower head and shoulders pattern. Source: TradingView
As shown above, the asset is in a downtrend, but after a significant drop, value buyers believe that the price has reached attractive levels and will start bottom fishing. When demand exceeds supply, the asset forms the first depression from the left shoulder and the price initiates a relief rally.
In a downtrend, traders sell in rallies. The bears sell aggressively after the pullback and the price drops below the first low, making a lower low. However, bears cannot capitalize on this weakness and resume the downtrend. The bulls buy this dip and begin a relief rally, forming the head of the pattern. As the price approaches the previous peak where the rally had stalled, the bears intervene again.
That starts the decline, culminating in the formation of the third channel, which stops almost in line with the first channel, as buyers anticipate a change and buy aggressively. This forms the right shoulder of the configuration. The price rises and this time, the bulls manage to push the price above the neckline, completing the pattern.
Thereafter, the neckline becomes the new bottom as traders buy the fall of this support. This signals the start of a new uptrend.
Identification of a new uptrend with the pattern (IHS)
BTC / USDT daily chart. Source: TradingView
Bitcoin (BTC) had been in a downtrend since it formed a local top at $ 13,970 on June 26, 2019. Buyers stepped in and halted the decline in the $ 7,000 to $ 6,500 support zone, forming the left shoulder of the pattern (IHS). This started a relief rally that pushed the price to $ 10,450. At this level, short-term bulls posted gains and bears initiated short positions, aiming to resume the downtrend.
Aggressive selling broke the support at $ 6,500 and the Bitcoin / Tether (USDT) pair fell to $ 3,782.13 on March 13, 2020. The bulls saw this drop as a buying opportunity and that started a strong relief rally, which reached about $ 10,450. This second channel formed the head of the assembly.
The right shoulder was shallow as the selling pressure eased and the bulls did not wait for a deeper correction to buy. Finally, the bulls pushed the price above the neckline on July 27, completing the (IHS) pattern.
The bears tried to catch the bulls and pushed the price down to the neckline. Although the price fell just below the neckline, traders did not allow the pair to stay below $ 10,000. This suggested a change in sentiment. The bullish momentum accelerated as buyers pushed the price above $ 12,500.
How to Calculate the Target Pattern of an IHS Configuration
BTC / USDT daily chart. Source: TradingView
To calculate the minimum target target of the pattern (IHS), calculate the depth from the neckline to the lowest point, forming the head. In the example above, the neckline is around $ 10,450 and subtracting the lowest point from $ 3,782.13 gives a depth of $ 6,667.87.
This value is then added to the breakout level, which in the example above, is close to $ 10,550. This gives you a target target of $ 17,217.87. When a trend turns from bottom to top, it can either fall short or exceed the target objective. Therefore, traders should use the target as a guide and not ditch their positions just because the level has been reached.
Patience pays off because sometimes the pattern fails
No pattern succeeds on every breakout and traders must wait for the setup to complete before starting trades. Sometimes the pattern structure forms, but the breakout does not occur. Traders who get ahead of the pattern’s completion and initiate trades are trapped.
LINK / USDT daily chart. Source: TradingView
For example, Chainlink’s LINK surpassed $ 4.58 on June 29, 2019, and a correction began. Buyers tried to stop the decline in the $ 2.20 to $ 2.00 zone. This formed a pattern (IHS) with a head and two shoulders as can be seen in the table above.
Although the price reached the neckline on August 19, 2019, buyers were unable to push the price above it. Because of this, the pattern was not completed and the buy signal was not triggered.
The LINK / USDT pair turned down from the neckline and broke below the head of the setup at $ 1.96, invalidating the pattern. This caught traders who may have bought before a trend reversal.
The pattern (IHS) could be a useful tool for traders to jump into a new uptrend as it begins. There are some important points to remember when using this setting.
Traders should wait for the pattern to complete, which occurs after the price breaks and closes above the neckline, before initiating any long positions. A breakout of the neckline, which is at above-average volume, is more likely to result in a new uptrend compared to a breakout that occurs at low volumes.
When a trend reverses, it usually continues for a long time. Therefore, traders should not be in a rush to ditch positions just because the target of the pattern has been met. At other times, the pattern completes but quickly reverses direction and the price plummets. Traders should watch the other indicators and price action closely before squaring a position.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Fintech Zoom.com. Every investment and trade move involves risk, you should do your own research when making a decision.
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