Double Action

A Highly Reliable Chart Pattern-Double Top And Double Bottom

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.

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.

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.

Buying starts with the price action again starting to climb. It reaches a high than falls again. It falls till a new low is reached that may be near the first low or not. But when it reaches the second low, what you may call a support is formed and the price action bounces back up again thus forming a W or Double Bottom Pattern. These Double Top and Double Bottom Patterns are very reliable in telling about the trend reversals.

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