The Technical Pattern of Bottom Fishing – The Head and Shoulders Bottom

I. What Is Head and Shoulders Bottom

The Head and Shoulders Bottom forms after a downtrend, with its completion marking a change in trend. The pattern contains three successive troughs with the middle trough being the deepest and the two outside troughs being shallower. The Left Shoulder, Head, and Right Shoulder respectively go from left to right.
Let’s take the September 2021 Bitcoin price chart as an example to illustrate the characteristics of the H&S bottom. BTC fell from $52,000 to $39,600 in just 3 weeks, with a cumulative drop of 23%. After that, a compound H&S bottom structure was formed near $39,000, and then the currency price pulled up to break above the Neckline and then retraced while remaining to rise, finally rising to $67,000, with a cumulative gain of more than 60% in 3 weeks, forming a strong reversal trend.
By simplifying the complex candlesticks pattern through technical analysis, users can see the relative positions of the Left Shoulder, Head, and Right Shoulder, as well as the Neckline connecting the two shoulders.
Let’s study the specific technical characteristics of the Head and Shoulders Bottom:

1. The price must be in a significant down-trend before the beginning of the formation.
2. When the declining trend ends, the prices will dip into three lows, forming three troughs. Among them, the lows of the left and right troughs are basically at the same level, called [Left Shoulder] [Right Shoulder]; the middle trough is significantly lower than the two shoulders, called [Head].
3. The highs of the Left Shoulder and Right Shoulder rally are the same, and the horizontal line connecting the two highs is called [Neckline]. When the price makes the final rally, it breaks above the neckline, indicating that the Head and Shoulders Bottom is formed.

4. When the price breaks above the neckline, the corresponding volume should be significantly enlarged, otherwise it may produce a false breakout.
   
   After understanding the technical characteristics of H&S Bottom, let’s study when to buy and sell in actual trading.
   Firstly, taking the Neckline as the Bull and Bear Index, the area above the neckline marks the rise of the long advantage area, and users should buy for the rise, not sell short. Below the Neckline is the down short advantage area, this range is suitable for short selling, and should not buy up.

5. Head and Shoulders Bottom Entry Point 1: Price Breaks Above the Neckline
   When the H&S Bottom pattern is set up, the candlestick breaking above the Neckline is a rising green candlestick as shown in the figure. The candlestick entity passing through the neckline marks a bullish signal, which means that the position forms the first buying opportunity. Once the pattern is formed, the market is expected to rise.
   

6. Head and Shoulders Bottom Entry Point 2: After Breaking Above the Neckline, Technically Retrace the Neckline.
   When the price breaks above the Neckline, it will slightly decline, and then rise again after retracing to the Neckline, we call such a price change retrace to confirm support. Retracing the Neckline creates the second entry point.
   

7. Head and Shoulders Bottom Entry Point 3: Breakout of Previous Highs
   When the H&S Bottom is formed, the price continues to rise, and after breaking through the previous high, the candlestick closes a positive line with the high above the previous high, thus forming the third entry point at this time.
   

• Summary of the technical meaning and application rules of the H&S Bottom.
  The first point to confirm is the three important technical features of the Head and Shoulders Bottom: The Left Shoulder, the Head, and the Right Shoulder. Also keep in mind the Neckline, the important Bull and Bear reference line.
  Accompanied by the continuous changes in the market, we find three entry points:

1. breakout of the Neckline - Entry Point 1;
2. retracement of the Neckline - Entry Point 2;
3. breakout of the previous high - Entry Point 3.

II. Compound Head and Shoulders

Due to the turmoil of the entire crypto asset market, there are very few standard Head and Shoulders patterns, while in the actual market, irregular Head and Shoulders or compound Head and Shoulders patterns will occasionally happen.
Appearing at the bottom, it indicates the end of a downtrend and the coming of an uptrend.
Appearing at the top, it indicates an uptrend’s end and a downtrend’s onset.

We know that a Head and Shoulders Bottom is a reliable technical pattern that indicates a bullish market. However, the market is always full of uncertainties and risks, so when the following pattern appears, you need to leave the market decisively even if it is an H&S Bottom pattern.
The Head and Shoulders Bottom pattern is formed when the price of a currency rises against resistance, then falls and breaks above the neckline. As shown in the chart, the down candlestick closes with a solid negative line and breaks above the neckline, which is the harbinger of the coming stock plunge.

Usually, there will be a second rally to the neckline in the technical pattern. If the rally did not break above the neckline and cannot break the previous high, this will be the best time to sell. Otherwise, the ensuing plunge will make you suffer severe losses.
A smart investor should not only sell cryptos when making money so that profits are maximized within the known range, but also should sell cryptos when losing money, ensuring that losses will be minimized to a controlled range.

III. Summary

When a Head and Shoulders Bottom pattern appears at the bottom, it is generally a more reliable bullish signal and may mean a reversal of the trend. Since the trend has inertia, a confirmed trend will generally continue to run in the direction of inertia, so a Neckline break is a real buy signal.
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Disclaimer
This information is for your reference only. The information provided by Gate.io above is not investment advice and is not responsible for any investment you may make. The information regarding technical analysis, market judgments, trading tips, and trader sharing may involve potential risks, investment variables, and uncertainties. This issue does not provide or imply any opportunity for guaranteed returns.