DOUBLE top and double bottom chart patterns are straightforward to spot and can be seen across a range of different time frames, both in long and short-term charts.
Double tops are important to look out for, as are double bottoms as they confirm a resistance point that has been retested a second time and failed.
This pattern should be seen as a set up for a possible trend reversal, and so traders should wait for the price to break below the neckline before entering the trade.
However, you need to look out for additional clues to base a trading decision on – did volume drop on the second run up? Was it a slightly lower high? Are the relative strength indicators (RSI), stochastic and moving average convergence-divergence (MACD) indicators turning lower, indicating weakness? Only then should you consider making the trade and selling short or closing a long.
HEAD AND SHOULDERS
Head and shoulders patterns are one of those that a lot of people like to follow and trade.
The skeptics out there would say that it is just another self-fulfilling prophecy, as traders jump on to a trade and help it get to target levels – but it is definitely a pattern you should be looking out for and watching as they form on a regular basis.
A head and shoulders formation can be a clear warning that momentum is fading from the market. The top of the head of the movement is formed with volumes dropping. The right shoulder is formed as the move runs out of momentum. Another thing to watch out for though is when a head and shoulders pattern fails. This can often result in a sharp move the other way as traders scramble to close out and traders taking the other side squeeze hard. So look out for head and shoulders patterns, but trade with caution.
Triangle patterns consist of two trend lines converging into a triangle, and the price moving between these lines. Triangle chart formations tend to be a sign that traders need to sit on their hands and wait to see where the breakout will head.
There are three kinds of triangle formations. Symmetrical triangles are seen as a suggestion that the trend is in a period of consolidation before continuing with the trend. The price will usually rebound between the descending resistance line and the ascending support line before breaking out in the direction of the original trend.
An ascending triangle suggests that the price will head higher upon completion. The key aspect is the ascending support line – indicating selling in the market, after which buyers will move in and raise the price above the breakout level and into an upward trend. By contrast, a descending triangle suggests that the price will turn to a bearish move on completion of the pattern, however traders should be wary of the price breaking the lower support line of the triangle pattern.
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