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.
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. 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.
This first peak in the price action forms the first leg of the M in the chart pattern! 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.
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.
But in most of the cases, the second high is always lower than the first high formed in the price action. The buying rally reaches a high point that is lower than the first high. Then the buying pressure fades again and the price action starts to fall thus forming the second leg of M in the chart 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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