A Highly Reliable Chart Pattern-M Tops And W Bottoms

by Ahmad Hassam on Monday, March 22nd, 2010 | No Comments

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.

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. 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.

This first peak in the price action forms the first leg of the M in the chart pattern! 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.

When selling starts, price action begins to fall. Selling is now driving the price action down. 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. 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.

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.

The W in the pattern is formed in almost in the similar fashion but in this case there is a downtrend. The first part of W is formed when the first bottom is reached. This is sort of a support where buyers jump in. Falling price action reaches it bottom, climbs again and then falls again forming the W Chart Pattern.

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 this simple 1 Minute Forex Trading System FREE that makes money instantly. Read the story of Richard Samuels, a post office mailman with a head injury and how he made a fortune with these Neutrino Forex Signals.