There are many stock chart patterns to behold, but one that appears from time to time is an “h” pattern. This pattern usually emerges after a steep bearish trend and is notable for its
shape, likened to the small letter h. That trend can span anywhere from a few minutes to a few weeks. There is also a bit of controversy and confusion about the h pattern.
Table of Contents
What Is the H Pattern?
On January 30th, 2024, I happened to trade and screenshot a textbook h pattern setup on a SPY one-minute chart as it progressed with nearly perfect follow-through. Some chart technicians call it a double bottom reversal, while others say, “H is hell for shorts.
In either case, one must clearly understand how to trade it, when, and how to find price targets within it. In this article, we will do just that. It does not matter what you call this pattern. All you need to know is that it is just another example of simple price action.
In this article, I will break down the h pattern, walk you through each step, and analyze it like I would with a double bottom reversal. The double bottom reversal is a very typical chart pattern.
A double-bottom reversal will often follow immediately after a steep bearish trend. The double-bottom reversal is a reactionary pattern that occurs when price action runs into known support.
Identify the H Pattern
Probably one of the most important things to know about the h pattern is that it is often a very short-term reversal and statistically will provide opportunities for a bearish trade at the end of the pattern development.
The formula for analysis is to note the first low, the first high, and then the second low after the steep bearish trend’s reaction to a support level or known demand zone. There are a few critical data points to focus on in that analysis.
I will use simple drawing tools to find those data points in my example. These data points may often be crude but are critical in identifying and confirming price targets.
These price targets can be used to enter and exit a trade or multiple trades. It is also important to recognize that each price target will come with a set of probabilities. First things first. Identify the h pattern.
Here's How
Here’s how to find the h pattern. Ultimately, a trader aims to trade a 50% retracement of the total move. One could use Fibonacci levels to identify key price targets, although there is an easier way. Split the range of the move in half. Next, identify the reversal pattern’s high, low, and mean at the bottom. Mark each of the levels with a horizontal line.
Why Does This Matter?
These statistics will depend on your trade plan’s entry and stop criteria for the h pattern. You certainly would not want to short the second low with only a 40% chance of follow-through.
The probability of price trading from the mean to the level of the high is only about 50%. Most skilled traders would rather not enter a long position, either. However, an avid trader would likely have entered a long position at the second low.
When the price returns to the mean, this is a great time to place a trailing stop just a couple of pennies above the second low. The idea is that a double-bottom reversal will fail when the price rejects the mean and then
breaks the second low.
Planning for the h pattern with a trailing stop will at least take one out of the long position with a small profit instead of a loss. The smart part of the plan is that the trailing stop will also move to a point that is just above the mean as the price crosses above the high.
One can always use a mental stop to exit the long position with a small profit. This trade had a candle that broke the mean with a long wick that would have missed a proper trailing stop by just one penny. Whether you use a trailing stop or not, you must plan your trade and trade your plan.
H Pattern Follow-Through
The probabilities change now that the price has broken out above the mean. Even though the price has not broken the high, the probability of the price hitting a 50% retracement of the previous trend shoots up to 80%! Why?
Remember that the double-bottom reversal is a reactionary pattern. After the bearish trend, the first low stopped at a known demand zone or support area. Bullish buyers did not cause the small upward trend that followed. That trend was caused by short sellers buying to close their bearish position.
The Bear Trap
Remember the red candle with the long wick that broke the mean? Often, the inexperienced trader who knows that the price will only have a 50% chance of returning to the high from the mean will set a limit sell order just above the mean to open a short position.
They expect a bear flag to emerge from the mean rejection. Can you guess where their stop loss is? Their stop loss is usually just a penny or two under the previous high. These bearish traders are forced to close their short positions, thus adding buying volume to the price action.
It’s hell for shorts.” This is why the move from just above the mean to the 50% retracement now has an 80% probability of follow-through. As a result, ensure you know how to spot the h pattern and what you’re looking for.
A Breakout Bar Is Born
Just above the mean is also where retail traders tend to enter a long position. Add that to the bearish retail traders being forced to cover, and a breakout bar will seem to blast through the previous high.
Notice how the small bullish trend ends with a wick just above the 50% retracement? The avid trader already saw this coming. That is exactly where to place a limit sell order to close your long position.
A red candle or two later, retail traders will often sell to close with a market order. Market makers buy market sell orders, and some consolidation just under the 50% retracement will tend to follow.
From here on, continuing a bullish trend to a 100% retracement only has a 50% chance of follow-through, so the h pattern traders will have taken their leave. Even experienced traders must understand that recognizing, planning, and trading the h pattern actively will take some time.
Practice Makes Perfect
This entire h pattern trade took place over just thirteen minutes. Two of those thirteen minutes were spent waiting for a limit buy order to fill. That is not even the impressive part. I did this while answering questions and pointing out price targets for our members in a live environment!
Getting this right is going to take some serious repetition. I regularly trade the “h” pattern on a 5-second chart, so I have had lots of practice. I recommend paper trading every price action pattern on a 5-second chart to gain that repetition rapidly.
It will not take long for one to gain the ability to quickly recognize, plan, and execute price action trading with practice on a 5-second chart. At Bullish Bears, I love to walk our members through everything I know about price action trading while live-streaming on our Discord server.
We pride ourselves on being able to answer questions live in both voice and chat. Come check it out for yourself. Thanks for reading!
