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To spot Bitcoin price reversals, professional traders watch for this traditional pattern

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  • The inverted head-and-shoulders pattern is seen by cryptocurrency and stock traders as a precursor to a bullish trend reversal
  • When prices fall, the mood is negative, and fear is at an all-time high
  • The (IHS) pattern is similar to the standard H&S top pattern in construction, but the formation is inverted

The inverted head-and-shoulders pattern is seen by cryptocurrency and stock traders as a precursor to a bullish trend reversal. 

Every trader wants to buy cheap and sell high, but only a few traders have the confidence to go against the crowd and buy when the downtrend reverses. 

When prices are decreasing, sentiment is negative, and anxiety is at an all-time high, but this is when the inverse head and shoulders (IHS) pattern might emerge. 

The (IHS) pattern is similar to the conventional H&S top pattern in terms of structure, but the formation is inverted. The (IHS) pattern denotes the conclusion of a downtrend and the beginning of a new upswing when it is completed.

Basics of inverse head and shoulders

After a downtrend, the (IHS) pattern appears as a reversal scenario. It has an upside-down head, left shoulder, and right shoulder that are all positioned below the neckline. The setup is completed by a breakout and closes above the neckline, suggesting that the downtrend has reversed. 

The asset is in a downtrend, as seen above, but following a substantial drop, value investors believe the price has reached attractive levels and will begin bottom fishing. When demand outstrips supply, the asset forms the first dip from the left shoulder and the price begins to rally in relief.

Traders sell on rallies in a downturn. After the pullback, the bears sell hard, and the price drops below the first trough, forming a lower bottom. Bears, on the other hand, have been unable to take advantage of this weakness and resume the decline. The bulls take advantage of the dip and launch a relief rally, producing the pattern’s head. The bears re-enter as the price approaches the last peak, where the rise had paused.

 The slide then begins, culminating in the creation of the third trough, which is nearly parallel to the first trough as buyers anticipate a turnaround and buy aggressively. The setup’s right shoulder is formed by this.

Using the (IHS) pattern to spot a fresh rise

Since forming a local top around $13,970 on June 26, 2019, Bitcoin (BTC) has been on a decline. The buyers stepped in and stopped the slide at the $7,000 to $6,500 support zone, forming the (IHS) pattern’s left shoulder. This triggered a relief rally, bringing the price to $10,450. Short-term bulls booked profits and bears opened short positions at this level, with the goal of resuming the downturn.

On March 13, 2020, aggressive selling breached the barrier of $6,500, and the Bitcoin/Tether (USDT) pair plummeted to $3,782.13. This collapse was perceived as a buying opportunity by the bulls, which sparked a strong relief rally that brought the price close to $10,450. The setup’s head was generated by the second trough.

The bears attempted to catch the bulls by bringing the price back to the neckline. Traders did not allow the pair to fall below $10,000, despite the price dropping just below the neckline. This indicated a shift in attitude. As purchasers drove the price beyond $12,500, the positive momentum increased.

What is the formula for calculating the pattern target of an IHS setup?

Calculate the depth from the neckline to the lowest point, forming the head, to get the minimal target objective of the (IHS) design. In the example above, the neckline is approximately $10,450, and the depth is $6,667.87 after removing the lowest point at $3,782.13.

This amount is then multiplied by the breakthrough level, which in this case is near $10,550. This results in a target goal of $17,217.87. When a downward trend turns upward, it may fall short of or exceed the planned goal. As a result, traders should utilize the objective as a guide rather than abandoning positions simply because the level has been hit.

The most important takeaways

The (IHS) pattern could be a handy tool for traders looking to get in early on a new upsurge. There are a few things to keep in mind when using this arrangement. Before entering any long positions, traders should wait for the pattern to complete, which occurs when the price breaks and closes above the neckline. In comparison to a breakout of the neckline on low volumes, a breakout of the neckline on above-average volume is more likely to result in a fresh uptrend.

When a trend reverses, it usually lasts for quite some time. As a result, traders should not be rushing to liquidate positions just because the pattern target has been fulfilled. On other occasions, the pattern completes, but the price suddenly reverses and plummets. Before squaring up a position, traders should keep a close eye on the other indications and price action.

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