Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade! This is a proprietary fibonacci retracement never disclosed before by Tom Strignano-EX CHIEF BANK TRADER. First practice on your Forex Demo Account. Download this 1 Minute Forex Trading System FREE that makes money anytime instantly. How do you know this is the market top or the market bottom when you look at the chart? The most reliable chart patterns that tell about a market top and the market bottom is the M and W patterns. Sometimes these look like the Double Top or the Double Bottom or what many chartists call the Head and Shoulder 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.
When the price action forms such a pattern and crosses lower than the interim low, it means that the trend has reversed itself. Now the W is formed in the same fashion when the price action falls. Selling continues, till a time that sellers get exhausted as there are no more buyers left in the market. This forms the first part of W.
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.