As a trader, you need to know when the price action reaches its peak or its bottom as it can herald the start of a new trend. How do you find out that the market is at its top or bottom? When you spot the famous Double Top or the Double Bottom Chart Pattern or what you may call the M or the W Chart Pattern, it means that the price action has reached its top or the bottom and is about to reverse itself.
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.
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!
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. When selling starts, price action begins to fall. Selling is now driving the price action down. 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.
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.
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. However, you need to confirm them with volume before you trade on these patterns. 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.
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