As we know, one of premise of technical analysis is history repeats itseilf. In other words, human behavior tends not to change. Then technical analysts study chart patterns, which reveal the psychology of the market. Chart patterns worked well in the past. They are assumed to work well in the future. Hence, the future is predictable. In this topic, we will define chart patterns and how to trade based on those patterns.
The double top and double bottom are reversal patterns. The double top pattern looks like a M. The double top pattern occurs in the uptrend and is a clear signal the preceding upward trend is weakening . Buyers are losing their interest. When price breaks down the neckline, the uptrend is considered to be reversed and the price will move lower. The expected minimum target equals the distance between top of pattern and the neckline.
This pattern looks like a W. The double bottom pattern occurs at the bottom of a downtrend and is a clear signal the preceding downward trend is losing momentum. Sellers are losing their interest. When price breaks out the neckline, the downtrend is considered to ve reversed and the price will move higher. The minimum target equals the distance between bottom and the neckline.
The example below describes how to trade a double top pattern. A sell order should be placed below the neckline.