The Head-­and-­Shoulders Bottom pattern is formed when the price of a pai rcreates a center trough (the inverted head, labeled 3) and the left and right inverted shoulders (1, 5). As you can see, this pattern is vertically symmetrical to the usual Head­-and-­Shoulders pattern and is formed when a pair is testing new lows on a downtrend. After reaching the lowest low (the Head, 3) the next low is shallower and the trend reverses course to the upside.

This type of formation happens when investors create a minimum support level for the price of a pair, and ultimately trading consolidates into an UP trend.

Trade idea

Once the pairprice breaks out from the top pattern boundary (the neckline), day traders and swing traders should trade with an UP trend. Consider buying the pairor a call option at the low once the pattern is confirmed, which is known as the breakout point. The pattern is confirmed when the price breaks above the Neckline (2,4). To identify an exit, compute the target price level by adding pattern height (the distance between the head (3) and the Neckline (2, 4)) to the neckline price level.

To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to sell at or below the breakout price.