There are many technical patterns that traders study to help inform their moves. Traders have assigned the patterns various names mostly based on their setup to try to make them memorable. While many chart patterns commonly appear, some are rare. Let’s take a look at the h-pattern stock chart and see how it can help you identify a profitable entry point.
Many investors want to see stock prices rising steadily. However, the reality is that stocks go up and down. The good news is that the price fluctuation often follows certain patterns. Therefore, you can take advantage of the movement in either direction to profit in any market condition. The h-pattern can be an important signal when you’re trying to manage a trade in a volatile market.
How does the h-pattern stock chart look?
The pattern is shaped like a lower-case letter “h.” It can appear in stocks, forex, or futures price charts. The setup shows a steep decline, followed by a brief rebound that sees the stock rolling back to retest its prior low. In most cases, the h-pattern setup signals in a stock in decline.
The interpretation is that after watching a stock falls sharply, bulls rush in to buy the dip and hope to turn the tide against bears. However, they quickly realize that they jumped in too soon and begin to exit. That drives the stock back to the prior low and it can even break below the support level if the bear charge proves too strong.
How to trade an h-pattern stock chart
The h-pattern is often a shorting signal. There are several ways you can trade during the h-shaped chart setup. Some short sellers jump in just when the pattern is beginning to develop. They’ll short at the rebound point and cover positions when the stock retests the recent previous low or increase the short bet at that point in anticipation of the stock sliding further down.
Other investors will sit on the sideline until the setup is complete and the h-pattern is confirmed to begin shorting. The wait is a strategy to minimize risk in case the bulls reappear to try to take control. If the stock breaks below its resistance, the signal is that the bulls have lost power and the second phase of the slide can be steeper.
Many consider the h-shaped chart as a piece of the Head and Shoulder pattern, which some traders also use as a shorting signal. In the Head and Shoulder setup, price actions result in a pattern with a high point sandwiched between the elevated ends that look like a head between shoulders. The line below the shoulders is called the neckline. If the price dips below the neckline, many traders take that to mean that the stock is going into a downside trend.
What you need to know before you short stocks in h-pattern chart
Shorting stocks can be a lucrative trading strategy. It's a high-risk undertaking that requires a careful approach. You may remember the struggle between Wall Street elites and WallStreetBets army in meme stocks GameStop and AMC Theatres. The epic short squeeze cost hedge funds billions of dollars. The massive loss led Citron Research to announce that it would no longer short stocks.