Pro traders look for this classic pattern to spot Bitcoin price reversals

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

When prices are dropping, mood is negative, and anxiety is at an all-time high, yet this is when the inverse head and shoulders (IHS) pattern may emerge.

The (IHS) pattern is similar in construction to the regular H&S top pattern, but the formation is inverted. On completion, the (IHS) pattern signals an end of the downtrend and the start of a new uptrend.

Basics of inverse head and shoulders

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

Pro traders look for this classic pattern to spot Bitcoin price reversalsBottom pattern is head-and-shoulders. TradingView is the source of this information.

The asset is in a downtrend, as indicated above, but after a big drop, value investors think the price has reached favorable 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 rise in relief.

Traders sell on rallies in a downturn. After the retreat, the bears sell hard, and the price drops below the initial trough, forming a lower bottom. Bears, on the other hand, have been unable to take advantage of this weakness and continue the decline. The bulls take advantage of the drop and launch a relief rally, creating the pattern’s head. The bears re-enter when the price approaches the last high, where the rise had halted.

The fall then begins, culminating in the development of the third trough, which is almost parallel to the first trough as buyers expect a reversal and buy aggressively. The setup’s right shoulder is formed by this. The price rises, and the bulls successfully push the price over the neckline, completing the pattern.

As traders purchase the drop to this support, the neckline becomes the new floor. This marks the beginning of a new upward trend.

Using the (IHS) pattern to identify a fresh rise

Pro traders look for this classic pattern to spot Bitcoin price reversalsDaily chart of BTC/USDT. TradingView is the source of this information.

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

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

Because selling pressure was lessened, the right shoulder was shallow, and bulls did not wait for a deeper drop to purchase. Finally, on July 27, the bulls completed the (IHS) pattern by pushing the price over the neckline.

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

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

Pro traders look for this classic pattern to spot Bitcoin price reversalsDaily chart of BTC/USDT. TradingView is the source of this information.

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

This amount is then multiplied by the breakthrough level, which in this case is around $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 intended goal. As a result, traders should utilize the goal as a guide rather than abandoning positions simply because the level has been achieved.

Patience is rewarded since the pattern does not always work.

At every breakout, no pattern succeeds, therefore traders should wait for the setup to finish before entering trades. The pattern structure may develop but the breakout does not always occur. Traders who trade before the pattern is completed are caught in a trap.

Pro traders look for this classic pattern to spot Bitcoin price reversalsUSDT/LINK daily chart TradingView is the source of this information.

Chainlink’s LINK, for example, reached a high of $4.58 on June 29, 2019, and then began to fall. In the $2.20 to $2.00 range, purchasers tried to halt the slide. As can be seen in the chart above, this created a (IHS) pattern with a head and two shoulders.

On August 19, 2019, the price hit the neckline, but buyers were unable to push it higher. The pattern did not finish as a result, and the purchase signal did not activate.

The LINK/USDT pair dropped from the neckline and broke below the setup’s head at $1.96, rendering the pattern ineffective. Traders who bought in expectation of a trend reversal were caught off guard.

The most important takeaways

The (IHS) pattern may be a helpful tool for traders looking to get in early on a fresh upswing. There are a few things to keep in mind while utilizing 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 contrast 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 objective has been reached. At other instances, the pattern completes, but the price rapidly reverses and plummets. Before squaring up a position, traders should keep a careful eye on the other indications and price movement.

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 objective has been reached. At other instances, the pattern completes, but the price rapidly reverses and plummets. Before squaring up a position, traders should keep a careful eye on the other indications and price movement.

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This article broadly covered the following related topics:

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  • bitcoin price falling today

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Emilia James
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