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We can calculate a target level by measuring the distance between the highest point of the head and the neckline. This distance is duplicated onto the breakout point, thus giving you your target level as displayed on the above chart.

Inverse Head and Shoulders:

The previous pattern may also be applied in bearish market conditions in a reverse aspect. The exact rules apply however it is simply the other way around. Once the neckline is broken, you will be expecting the market to provide you with a long set up, otherwise known as bullish.

Once you have chosen to execute a long trade you should place your stop loss around the right shoulder. Just as the target level was calculated on the head and shoulders pattern, you would now measure the distance between the valley of the head to the neckline and duplicate it into the breakout point.

Here is a clear example of an inverse head and shoulders formation.

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