Trend trading is all about knowing when the market is at its top or at its bottom. When the market reaches its top, it means that the price action is about to start falling and the uptrend will turn into a downtrend. In the same manner, when the market reaches its bottom, it means that the price action will start climbing again and the downtrend will soon turn into an uptrend. So how do you know that the market is at its top or at its bottom? The most reliable chart pattern that tells that the market is at its top or at its bottom is the Double Top or the Double Bottom or what you may call the M/W Chart Pattern. 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. 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. 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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