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, 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!
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.
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. When the second peak is reached, the buying stops and selling starts, this forms the second leg of the M 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.
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.