What if I tell you that the letter “M” and letter “W” you’re seeing in your trading chart are something you need to look out for?
Why?
Simple: this formation suggests that a trend reversal is about to happen. You can use it to form an informed trading decision, whether to enter or exit a long or short position.
This lesson walks you through the logic behind the formation of double-top and double-bottom patterns. Learn what you should do to maximize the profitability potential of these patterns.
Forex patterns are distinctive shapes that form within your trading chart. A significant pattern is distinctive; thus, it should follow a certain trendline to be actionable.
If it’s random, it’s insignificant.
Since forex patterns draw out the market's historical price and volume data, they are considered crucial tools for technical analysts. Forex traders can compare current price actions against the previous trends, which signals how the market will trade over a certain period.
These patterns represent the battle between the sellers and buyers or the participants’ psychology. Here are the primary trends that chart patterns signal:
Remember, the market forms tons of patterns, which can either drain your investment or boost its profitability. Additionally, it can give you a false signal.
Make sure you always use it with other indicators and momentum oscillators to confirm the signal. You can also ask the community about the accuracy of the pattern—you may be looking at a random pattern!
| Double Top | Double Bottom | |
| Signal | Bearish Reversal | Bullish Reversal |
| Preceding Trend | Uptrend | Downtrend |
| Following Trend | Downtrend | Uptrend |
When you chart the market, connect trendlines, and draw either a letter “M” or “W” on the chart, you might be looking at a double top or double bottom pattern. To be precise, a trend reversal signal.
The formation of these two patterns suggests that the market will potentially reverse from bullish to bearish or vice-versa. This conclusion is formed because the market had hit two consecutive peaks and troughs at almost the same level.
With its reversal signal, it helps traders make informed trading decisions, such as deciding on profitable entry and exit points and where to place stop-loss and take-profit level.
A double-top pattern forms during an uptrend market. The formation of this pattern signals the end of the prevailing bullish trend because of the dominating selling pressure.
What happens to the market during this formation is it tries to trade higher, but the selling pressure keeps on pulling the price back down.
To confirm whether the pattern indicates a bearish reversal, it should have these two distinctive parts:
The second peak should never trade higher than the first one. Why?
Simple: it means that the buying pressure is not as strong as in the previous period. It shows that the buyers are losing control of the market.
Because of the dying bullish momentum, the price will trade below the valley (support level) after its second peak to confirm the bearish reversal.
When this pattern forms, you exit your long position or enter a short one.
If buying, you should place a stop just above the support level to prevent further loss of money. Sellers should place their entry point at the support level, with a target profit of the inverse level of the tops.
The double bottom pattern is the total opposite of the double top pattern. You aim to enter a long position or exit a short one when this price pattern forms.
A double-bottom pattern should occur during a downtrend when selling pressure prevails in the market. However, the pattern formation should have two short upward trends between the double troughs (bottom) to form a valley (resistance level).
When a double bottom or letter “W” shows up in your chart, it signifies the intervention of buyers and the potential for the buying pressure to take over in the market.
Note: The second bottom (trough) should never trade lower than the first one. This signifies that the selling pressure is about to end.
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