Now that we have learned the basics of technical analysis and multi time frame analysis the next thing we will look at is chart patterns in the forex, futures and stock markets. Chart patterns are what technical traders look for on historical price charts to help them determine what the current supply and demand forces are, and how prices may be affected as a result.
In our previous lessons on trends and
support and resistance, we have already identified several of the most basic chart patterns which traders use to place trades. As you remember from these lessons, some of the more common patterns are up trends (bullish pattern), which when we view on a chart we identify with a potential buying opportunity, and down trends (bearish pattern), which we identify as potential selling opportunities.
Although support and resistance are not classified as chart patterns there are many chart patterns which are associated with identifying support and resistance, and we will start by examining the most basic of these patterns.
A double top is a reversal chart pattern which is defined by a chart where a financial instrument makes a run up to a particular level, then drops back from that level, then makes a second run at that level, and then finally drops back off again.
Currency Chart Example of a Double Top:
In its most basic sense what the double top pattern is saying about supply and demand forces is that demand is out pacing supply (buyers are winning) up to the first top causing prices to rise, and then the equation flips and demand is no longer out pacing supply (sellers are winning) causing prices to fall. After then falling back the buyers make another run at the same price and then after failing to break that level for a second time, sellers take control and keep the upper hand causing prices to sell of even more dramatically after the second top than they did after the first. For double bottoms the reverse is true.
A double bottom is also a reversal pattern in the futures, forex, or stock markets which is the exact opposite of a double top. To form a double bottom a financial instrument makes a run down to a particular level, then trades up from that level then makes a second run down to at or near the same level as the first bottom, and then finally trades back up again
Chart Example of a Double Bottom:
You can also see the connection here between the double top and double bottom pattern, and support and resistance as the double top forms resistance and the double bottom forms support.
Double Top Forms Resistance:
Double Bottom Forms Support:
That completes our lesson for today. You should now have a good understanding of the basics of chart patterns and of two of the more common patterns, double tops and double bottoms and most likely have already started to think about how one might integrate these into their trading strategy. In tomorrow's lesson we will go over the exact details of a common strategy used to trade double tops and double bottoms in the stock, futures and forex markets.
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