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Double Top And Double Bottom-A Highly Reliable Chart Pattern
How do you know this is the market top or the market bottom when you look at the chart? The most reliable chart patterns that tell about a market top and the market bottom is the M and W patterns. Sometimes these look like the Double Top or the Double Bottom or what many chartists call the Head and Shoulder Pattern.
Now, first we need to understand how these patterns are formed. Markets tend to move all the time. When a trend starts, market advances tend to get carried away as traders and investors scramble to get onboard the new trend. Buying frenzy starts. Everyone wants to buy.
Eventually, the buying pressure subsides and the price action hits a peak. The buying pressure loses steam and there are now not many buyers left in the market. Those with long positions also decided to take profit and exit. This was the first leg of M is formed.
The price action starts to drop again. It drops till a point where buying again starts. The price action starts to climb again. Now, a new rally starts in the market. If the second high is formed higher than the first high, this results in the formation of the head of the Head and Shoulder Pattern.
However, in almost majority of the cases, the second peak is lower than the first. The second buying rally has a peak that is lower than the first. When the second peak is reached, the buying stops and selling starts, this forms the second leg of the M pattern.
When the price action forms such a pattern and crosses lower than the interim low, it means that the trend has reversed itself. Now the W is formed in the same fashion when the price action falls. Selling continues, till a time that sellers get exhausted as there are no more buyers left in the market. This forms the first part of W.
When buyers start buying, price action begins to rise again till it reaches its high and then falls again. Whatever, these Double Top and Double Bottom Patterns or what you call the M and W Chart Patterns are highly reliable indicators of price reversal. However, you need to confirm them with volume before you trade on these patterns.
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