Inverse Head & Shoulder is a very powerful pattern in the market. If it is drawn with proper rules and followed with good risk management, it can easily give us very good returns.
Examples of Inverse HnS
L&T Finance Holding: 1 Day chart
Icici Securities: 1 Day chart
Now, as you have seen some examples of Inverse HnS, we can move forward with our discussion.
3 Parts of Inverse HnS
- Head
- Shoulder
- Neckline
As discussed above, Neckline is most important and should be generally straight for good formation. The neckline should at least have 4 important points for formation.
Rules for taking a trade based on Inverse HnS
- The overall trend in stock should be downwards.
- The neckline should at-least have 4 important points.
- Head should be bigger than the shoulders.
- For final confirmation of the trade, the stock should form a proper good green candle above the neckline with heavy volumes.
Target & Stop Loss for the Trade
- Initiation of Trade: After the formation of a green candle with heavy volumes.
- Stop Loss: Should be below the last shoulder.
- Target: Distance between last shoulder & Neckline.
Calculating Target & Stop loss for L&T Finance Holding
NeckLine: Formed @ 104
Stop Loss: Last shoulder @ 93
Target: Difference between last shoulder & Neckline 104-93=11. After confirmation 107.7+11=118.7
L&T Finance Holding Updated Chart
Stock made a high of 123 from 108 within 2 days.
Some points to note
Some of the time our neckline will not be straight or can have more than 4 joining points. In such cases, you need to make some adjustment to your chart.
Once you have achieved the half target, move your stop loss to cost or can do partial profit booking.
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Happy Learning.