Five Chart Patterns Every Trader Should Be Able To Recognize (Part 1)

04/07/2008 12:00 am EST

Focus:

Double Tops and Double Bottoms

Double tops do not only provide technical traders with a firm indication of a beginning downward trend; they also prove that price movement is not random, but rather is a clear indication of market sentiment. Double tops occur when a new high is plotted, raising the resistance level. The price then retraces and declines, only to rise again and reach the same high or resistance level.


As can be seen in figure 1 double tops can be thought of as true market sentiment. Traders around the globe push the price to a new high; because the new high is a tad extreme the price is subsequently brought back down. Again traders push up to the same level, testing it just one more time; again the price feels too extreme. The market has decided that an upward trend is just not in the cards, twice a new high was tested and twice the market sold to push it back down. After noticing a double top a trader is generally safe to assume that for the time being the market will move in a downwards trend, thus affording an opportunity to sell, or exit a soon to be falling long position.

Of course, double bottoms are just the opposite of double tops. Twice the market will test a new low, and twice the market will refuse the idea of pushing beyond that point. The buyers will rally and an uptrend will follow.

Pattern #2 tomorrow.

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