How to calculate the increase after the head and shoulders bottom pattern at the daily level is established?

Understanding the Head and Shoulders Bottom Pattern

The head and shoulders bottom pattern, also known as the inverted head and shoulders, is a reversal chart pattern commonly observed in cryptocurrency price charts. It typically signals a shift from a downtrend to an uptrend. The structure consists of three distinct lows: the left shoulder, the head (the lowest point), and the right shoulder (which is usually slightly higher than the left). These are connected by a resistance line called the neckline.

This pattern forms over several trading days, making it particularly relevant when analyzing daily level charts. Traders use this formation to anticipate potential price increases after the neckline is decisively broken upwards.

Key components:

• Left Shoulder: A significant low formed during the ongoing downtrend.
• Head: A deeper low following the left shoulder, indicating continued bearish pressure.
• Right Shoulder: A third low that does not fall below the head, showing weakening selling momentum.
• Neckline: A horizontal or slightly sloping resistance line connecting the peaks between the shoulders and head.

Confirming the Formation of the Pattern

Before calculating the expected price increase, it's crucial to confirm that the pattern has fully formed. This includes ensuring:

Confirmation criteria:

• The price breaks above the neckline with increased volume.
• The breakout should be sustained for at least one full candlestick on the daily chart.
• There should be no immediate retest failure — the price should remain above the neckline.

Failure to meet these conditions may indicate a false breakout, which can lead to incorrect projections.

Determining the Measurement Objective

Once the pattern is confirmed, traders use a standard method to project the minimum expected move after the breakout. This involves measuring the vertical distance from the lowest point of the head to the neckline.

Here’s how to calculate it:

Measurement steps:

• Identify the lowest point of the head.
• Measure the vertical distance between this point and the neckline.
• Project this same distance upward from the point where the price breaks the neckline.

For example, if the head reaches $100 and the neckline sits at $120, the difference is $20. Once the price breaks above $120, the projected target becomes $140.

Applying the Projection on Cryptocurrency Charts

In the context of cryptocurrencies like Bitcoin, Ethereum, or altcoins, the head and shoulders bottom pattern can appear across various timeframes. However, when analyzing the daily chart, the projection carries more weight due to the longer-term nature of the pattern.

Traders often combine this with other tools such as:

• Volume analysis to confirm the strength of the breakout.
• Fibonacci extensions to identify additional targets beyond the initial projection.
• Moving averages to assess whether the trend is supported by broader market dynamics.

It’s important to note that while the projection gives a baseline, real-world outcomes can vary due to volatility, news events, or changes in market sentiment.

Adjusting for Market Conditions

Cryptocurrencies are inherently volatile, so relying solely on technical patterns without considering external factors can be risky. Here’s how to adjust your expectations:

• Check for any upcoming regulatory announcements or major exchange updates.
• Monitor on-chain metrics such as large whale movements or exchange inflows/outflows.
• Use risk management tools like stop-loss orders to protect against sudden reversals.

These adjustments help refine your strategy and improve the accuracy of your projections derived from the head and shoulders bottom pattern.

Frequently Asked Questions

What if the neckline is sloped instead of horizontal?

A sloped neckline is common and doesn’t invalidate the pattern. In such cases, measure from the breakout point along the angle of the neckline rather than using a flat horizontal reference.

Can the head and shoulders bottom appear on intraday charts?

Yes, but the reliability of the pattern increases significantly on higher timeframes like the daily chart. Shorter timeframes are more prone to noise and false signals.

How long should I wait after the breakout before entering a trade?

Ideally, wait for confirmation through a close above the neckline and observe volume. Entering too early can expose you to fakeouts.

Is it necessary for the right shoulder to mirror the left shoulder exactly?

No, symmetry isn't required. The key is that the right shoulder does not break below the head, indicating diminishing bearish momentum.