By Taro Hideyoshi
In addition to indicators; such as Moving Average (MA), Relative Strength Index (RSI) or Moving Average Convergence / Divergence (MACD) that traders can add to the price chart to help them in technical analysis. The price chart itself can help traders in market trend prediction.
When analyzing the price, traders may look for a reversal pattern. The reversal patterns indicate a change or trend reversal is about to occur.
I’m quite sure that you have heard the most well-known reversal patterns as double top, double bottom, head and shoulders, reverse head and shoulders. They are basic reversal patterns that traders should get started with before go further to more advances.
Therefore in this article, we will discuss and review the key points the most basic and popular patterns, double top and double bottom.
Double top happens when price is in an uptrend. The price goes up and pulls back. Then it resumes the uptrend but when it reaches the resistance established by the first peak. Traders refuse to pay higher prices. Therefore the price starts retracing to previous low.
The key points:
– It looks like an “M” when it’s completely form
– It indicates that bear is coming
– If the price forms the double top pattern and falls below consolidation support, it will sink lower.
– If you are holding a long position when the price is approaching the second peak in an uptrend, keep monitoring and get ready to take profits when other indicators confirm the reversal.
Double bottom is the upside down version of double top. The price goes down and bounces during a down trend. Then the price resumes the downtrend but when it reaches the support established by the first sink. Traders refuse to sell lower prices. Therefore the price starts to retrace to its previous high.
The key points:
– It looks like a “W” when it’s completely form
– It indicates that bull is coming
– If the price forms the double bottom pattern and penetrate thorough consolidation resistance, it will rise higher.
– If you are holding a short position when the price is approaching the second bottom in a downtrend, keep monitoring and get ready to take profits when other signals confirm the reversal.
Whatever the time frame you trade, you can always spot the patterns. The reversal patterns (also continuation patterns) show up in chart of every time frame.
About the Author
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
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