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Day Trading Crypto: Mastering Inverse Head and Shoulders for Short-Term Gains

When it comes to trading cryptocurrencies, technical analysis is an essential part of the game and this concept can be applied to the cryptocurrency of your choice. There are thousands of different patterns that traders use to predict price direction, but the inverse head and shoulders is a dependable sign for a bearish-to-bullish trend change. 

In this article, we are going to review in more detail the diagram formation called the inverted head and shoulder, and we will discuss how to approach finding it and what profit you can extract by trading crypto intraday.

Understanding the Inverse Head and Shoulders Pattern

An indication of a change in trend from a downward to an upward one, the inverse head and shoulders pattern comes in three different forms:

  • Left Shoulder: A price decline followed by a bottom and then a rise.
  • Head: The price is dropped even lower before eventually rebounding in this region of the curve.
  • Right Shoulder: This is the opposite of the left shoulder but the right slows decline before the second rally.

Add to this the continued acceptance near the neckline, a support/resistance level extended horizontally by one of the peaks from the shoulders and the head, and the pattern is even more complete. It is a breakout that may lead to an uptrend.

Formation and Identification

  1. Left Shoulder: The price drops to a low point, forms a trough, and then rises.
  2. Head: The price falls again, reaching a lower low than the left shoulder, forming the head, and then rises once more.
  3. Right Shoulder: The price drops again, but this time to a higher low than the head, forming the right shoulder, and then rises again.
  4. Neckline: Draw a line connecting the peaks between the shoulders and the head. When the price breaks this line, the pattern is confirmed.

Volume Consideration

This pattern confirms with volume. The idea is volume should fall as the pattern is formed and then rise sharply as the neckline is broken. This rise in volume serves as confirmation of the breakout, and raises the probability of a trend change.

Applying the Inverse Head and Shoulders Pattern in Day Trading Crypto

Day trading refers to buying and selling a security, currency or future within a single trading day in an attempt to profit from short-term price fluctuations. For instance, day traders that are searching for entry and exit points may find the inverse head and shoulders pattern extremely helpful.

Identifying Potential Entry Points

The volume should be closely watched when the price heads towards the neckline after the formation of the right shoulder. 

If the price breakouts above this neckline with an increase in the volume then it is a good level to go long in the market. 

Therefore, placing an buy order slightly higher than the neckline may allow you to catch the price after the price falls to confirm the pattern.

Setting Stop-Loss and Take-Profit Levels

Day trading is essentially returns without risk management. Using these stop-loss and take-profit levels can help in cutting losses and locking in gains as part of managing risk when trading the inverse head and shoulders pattern. 

The usual way is to put the stop-loss order below the right shoulder low. For take-profit levels, traders may calculate the difference between the low of the head to the neckline and add this distance on top of the break-out point. This target can be used to calculate the potential return from the trade.

Monitoring Active ICOs and Upcoming ICOs

Although watching for patterns such as the inverse head and shoulders or even keeping an eye on active ICOs and ICOs around the corner. 

They can bring fresh volatility and opportunities into the market. Integrating ICO analysis in your trading plan can improve the quality of your investment choices and expose you to more trading opportunities.

Real-World Examples and Case Studies

Bitcoin (BTC)

First, Bitcoin had been in a prolonged bear market from the early part of 2023, and over the period of a year, an inverse pattern had formed. The left shoulder was created by the price of $25,000, the head - by $20,000, and the right shoulder - by $22,000. 

A spike in volume erupted through the drawn $26,000 neckline confirming a Head and Shoulders pattern. This breakout coincided with a huge move up in price, with Bitcoin rocketing higher to $35,000 in just a few weeks.

Ethereum (ETH)

Ethereum inverse head and shoulders mid-2022. The shoulder on the left was created at $1,800, the head was put in at $1,500, with the right shoulder at $1,600. Volume broke the neckline at $1,900 and began an incline straight to the $2,500 top.

Combining the Inverse Head and Shoulders with Other Indicators

The inverse pattern is a strong signal on its own, and when combined with other technical concepts it becomes even stronger and less prone to false signals.

Moving Averages

Trend changes are confirmed by moving averages such as the 50-day and 200-day moving averages. In the event of a breakout through the neckline and the top of its most noteworthy moving averages, it would help back-up the positive ultimate upward pattern reversal power utilizing the inverse head and likewise the shoulders pattern.

Relative Strength Index (RSI)

The RSI tries to identify the change and speed of price movements. The RSI move from oversold levels below 30 to above 50 as the price breaks the neckline is a confirmation to the bullish reversal signaled by the pattern.

Volume Indicators

As stated before, volume is an important requirement for the pattern to be complete for inverse head and shoulders. In combination with the OBV, (VWAP) Volume-Weighted Average Price and other volume indicators may lead a trader to stock up with the strength of the breakout as well.

Risk Management and Trading Psychology

Becoming a master of the inverse head and shoulders formation requires more than just technical knowledge. At the same time, we shouldn't forget that good trading psychology and a good risk control are just as important.

Managing Risk

Always use stop-loss orders to protect your capital! Note that cryptocurrencies are highly volatile and may move against you rapidly. A stop-loss, if properly placed, can help you control your risks and protect your trading account.

Maintaining Discipline

Discipline is key to day trading. So follow your trading plan and stay away from trading impulses. Like any trading strategy, the inverse head and shoulders form is not going to help you win 100% of the trades. Taking lossees and getting on to the next trade is part of a disciplined process.

Staying Informed

The currency is moved by a lot of things in the cryptocurrency market, regulates update, technology even market movements. Keeping up with the news of the day and watching the trends can be useful information to keep in the front of your mind as you make trading choices.

Best Crypto to Buy and Best Crypto to Invest In

While these patterns could be continued with any cryptocurrency, we should be more concerned with the best crypto to buy and invest in. 

Isn't it wise to only use more reliable patterns for technical analysis? If you can pick the best crypto to invest, your prospects of trading success also grow in leaps and bounds as having a good strategy.

Conclusion

With the application of the reserve head and shoulders trends, day trade crypto can be a lethal strategic power for immediate market bolster. With this article you will be able to recognize the pattern, what it indicates, where likely turns are to occur, and using that information to decide if a trade should be entered. 

Thus, using this pattern along with other technical indicators, good risk management, and discipline is the key to this strategy to make it work well.

In the volatile realm of cryptocurrency, paying attention to which ICOs are live and which ones are coming can be an excellent means of informing yourself on the best crypto to buy and invest in. You sharpen your trading skills, and while the market is up, you still manage to make some profit on the side.

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