Example IHS Pattern in Crypto Trading
The inverse head and shoulders pattern is one of the most popular and reliable chart patterns in technical analysis. It signals a bullish reversal of a downtrend and often precedes a significant rally in price. Before you can use it in your cryptocurrency trading strategies, the first step is to identify the formation of the IHS pattern on the price chart.
In this blog post, you’ll get to closely examine a real-life example of the inverse head and shoulders pattern with the Bitcoin/USDT pair.
Example of Inverted Head and Shoulders Pattern in BTC/USDT
Here’s what an inverse head and shoulders pattern looks like on a real-life chart:
The chart shows the BTC/USDT pair’s daily price action from March to November 2020.
On February 3rd, 2020, Bitcoin (BTC) experienced a significant price peak at $10,166, which marked the beginning of a downtrend. During this decline, buyers intervened when the price fell to the $8,400 to $8,000 support range, starting to form the head of an Inverse Head and Shoulders (IHS) chart pattern. The lowest point of the head reached $3,782 on March 9th, 2020.
Following this, a relief rally occurred, driving the price back up to $10,111 on July 20, 2020, forming the right shoulder. At this level, short-term bullish traders took profits, and short-term bearish traders opened short positions, aiming to resume the downward movement.
Between October and November 2020, aggressive buying led to a continuous uptrend, making the Bitcoin/Tether (USDT) pair go up from $11,490 to around $19,130. This rise was seen as a selling opportunity, leading to a visible bullish trend.
The Psychology Behind The Inverted Head and Shoulders Pattern
You can often see the inverted head and shoulders pattern in crypto markets, especially in times of high volatility and uncertainty. The pattern reflects the psychology of the market participants who go through phases of fear, disbelief, hope, and optimism. The inverted head and shoulders pattern can help traders identify potential turning points in the market and profit from them.
Here's a breakdown of the psychology behind this pattern:
The left shoulder represents a phase of market accumulation. Traders are gradually accumulating assets at lower prices. Fear and pessimism drive the market during this phase as investors are uncertain about the crypto asset's future.
Bears start selling making the price go below the first through. But as they can’t take advantage of the low price, they’re unable to reverse the downward trend.
The head of the pattern signifies a panic phase. Prices plummet to their lowest point. At this stage, most traders are selling as fear and pessimism are at their peak. This is the moment when savvy traders recognize a potential reversal.
The bulls initiate a relief rally, and this is where the head of the pattern forms. As the price approaches its former peak, the bears step in once again.
At this point, the market embarks on a descent, ultimately giving rise to the right shoulder, nearly mirroring the left one. The right shoulder marks the recovery phase. While there’s still some uncertainty, the market's overall sentiment is gradually shifting towards optimism. Traders anticipate a turnaround and start buying, so the price climbs.
Following this breakthrough, the neckline becomes a solid support level, as traders buy during the descent to this price range, marking the beginning of a new upward trend.
Mastering the art of trading psychology and recognizing patterns like the inverted head and shoulders can significantly enhance your success in the volatile world of crypto markets. Keep in mind to continuously monitor the trade and be prepared to adjust your strategy if necessary.
While the IHS pattern is a powerful tool, it should be used in conjunction with others, like trend lines, support and resistance levels, moving averages, oscillators, etc., to confirm or invalidate the pattern.