Trend trading is all about knowing when the market is at its top or at its bottom. When the market reaches its top, it means that the price action is about to start falling and the uptrend will turn into a downtrend. In the same manner, when the market reaches its bottom, it means that the price action will start climbing again and the downtrend will soon turn into an uptrend. So how do you know that the market is at its top or at its bottom? The most reliable chart pattern that tells that the market is at its top or at its bottom is the Double Top or the Double Bottom or what you may call the M/W Chart Pattern.
Now, when an uptrend starts, everyone wants to jump on the bandwagon. Traders and investors are desperate to ride the trend as soon as possible. This starts heavy buying in the market that pushed the price action up. These chart patterns are formed due to the behavior of the buyers and sellers in the market. They don’t appear all of a sudden out of thin air. What they represent is the mass psychology prevading the market.
But this upward push ultimately at some point loses its momentum. When it does, buying stops and selling starts. This is the top of the market or the peak in the price action. This first peak in the price action forms the first leg of the M in the chart pattern!
When selling starts, price action begins to fall. Selling is now driving the price action down. Those traders who had long positions, now want to take profit and exit. This selling continues until a point is reached where buyers again jump into action driving the prices up again. This results in the formation of a second peak in the pattern that might be close to the first peak or lower than it. If the second peak is higher than the first, the chart pattern formed is the Head and Shoulder Pattern.
When the second peak is reached, the buying stops and selling starts, this forms the second leg of the M 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.
The W in the pattern is formed in almost in the similar fashion but in this case there is a downtrend. Falling price action reaches it bottom, climbs again and then falls again forming the W Chart Pattern. The first part of W is formed when the first bottom is reached. This is sort of a support where buyers jump in.
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.
Mr. Ahmad Hassam has done Masters from Harvard University. Download these Forex Scalping Cheatsheets FREE. First practice on your Forex Demo Account and double it three times in a row before trading live.
