Today we will talk about Double Top and Double Bottom a.k.a. MW Patterns – old fashioned patterns that are constantly drawn on trading charts in Forex. Double Tops and Bottoms happen on a regular basis on low time frames like (M30 & H1). M&W Patterns on higher timeframes (H4 & D1) are more reliable, but it does not happen that much. Switch to the next paragraph if you want to know more details about the Double Top Double Bottom MT4 Indicator.
MW Patterns – Double Top and Bottom
Double Top and Bottom MW Patterns are repetitive structures which the price creates during the cycle moves. Therefore, we divide the MW Patterns into two types: M pattern, which is also known as Double Top chart pattern, and W Pattern, which is also known as Double Bottom chart pattern.
M Pattern – Double Top Pattern
An M Pattern is the way the market is producing a Double Top pattern, creating a resistance zone on the chart. The price creates two tops on the same level and starts a decrease. The pattern appears after a bullish price trend and can reverse the tendency. A short trading opportunity opens with the Double Top pattern.
This is a Double Top Chart example – the M chart pattern. The two tops of the M pattern are marked with the black spots on the chart. In the time of the second bounce from the yellow resistance area, we get a Hanging Man candle pattern, which has reversal functions. This confirms that the price will probably start a decrease. See that the second bounce from the resistance level leads to a price drop, which could be traded short.
At the same time, there is a second opportunity on the chart. The level indicating the bottom between the two tops is called a Double Top Neck Line. If the price action breaks the Neck Line, then we can pursue a further target downwards. The minimum expected move after a Double Top Breakout would then be equal to the distance between the resistance level of the Double Top and the bottom between the two tops. As you see, the price action completes this move afterward.
W Pattern – Double Bottom Pattern
On the opposite side, when the chart draws a W Pattern we have a Double Bottom pattern, where the price action creates couple bottoms in the same support zone. The Double Bottom pattern appears after bearish trends and is known to reverse the price action. In this relation, the Double Bottom chat pattern often leads to increase in the price action. When a bullish price bounce appears after the creation of the second bottom, this is likely to bring the price increase. This is the case when Forex traders have the opportunity to go long on the Double Bottom chart pattern.
As you see, the W formation is the same as the M chart pattern, but upside down. The W pattern is a two bottoms one top figure in the time of the consolidation, in comparison to the M pattern, which has two tops and one bottom. In this relation, the Double Bottom rules are also opposite to the rules of the Double Top chart pattern.
The two black spots on the chart mark the two bottoms in the support zone of the Double Bottom chart pattern. In the time of the second bounce, we see the formation of Double Engulfing candle pattern, which consists of 3 candles – a small candle, a bigger candle that engulfs the first one, and a third candle, which engulfs the first two candles. This pattern is known to have a strong reversal potential. Therefore, it could be used to buy the Forex pair on the second bottom of the W pattern.
When the price bounces are upward creating the second W bottom, we have a nice long opportunity on the chart. If the level at the top between the two W bottoms breaks afterward (Double Bottom Neck Line), then you can trade the Double Bottom breakout for a further price move equal to the size of the W pattern. This is shown with the couple pink arrows on the Double Bottom Chart.
Double Tops and Bottoms Trading
The Double Tops and Bottoms trading are one of the most common approaches to profit from chart patterns in Forex. Experts in Forex trading have determined a Double Tops and Bottoms success rate of around 70%. This means that in about 70% of the cases the price action will bounce from the support/resistance area, breaking the M&W pattern Neck Line and creating a further move equal to the size of the MW pattern. Therefore, if you trade properly the Double Top and Double Bottom chart patterns, you will have the opportunity to profit from the currency value of Forex pairs.
W Pattern Example – Double Top Chart Pattern
In the video, we demonstrate an M pattern on a MetaTrader chart. We entered a short trade on the M top.
Since we are interested in these patterns, we notice a particular point where the market could react. It’s, in fact, the key level to watch for further direction confirmation or time to reverse the initial position. I called it “CP” Center Point. It’s the middle price level of the structure of Double Top chart pattern. I placed a Take Profit on that “CP” level.
Another great thing about our M pattern strategy is the Risk/Reward potential of the Double Top. Our Stop Loss order is always tight as we are supposed to enter on the bounce from the resistance level at the top of the M pattern. If the market goes opposite to the trade and breaks through the Double Top resistance, it is pointless to keep the position alive.
The Double Bottom Chart Pattern a.k.a. W pattern works the same way, but in the opposite direction. In this relation, you should use the bounce from the second W bottom to enter a long trade and to buy the Forex pair. Then you can pursue the Center Point of the Double Bottom. If then the price action breaks the top between the two bottoms, you can also shoot for additional bullish price move equal to the size of the W formation.
M&W Patterns Indicator for Double Top and Double Bottom
Below you will find a link to an M&W Patterns indicator for the famous Meta4 trading platform (MT4). This Double Top Double Bottom MT4 indicator draws the patterns automatically on the chart, so you can recognize them easy. You can download the M&W Patterns Indicator for free until the end of December 2016.
- MW Patterns refer to Double Top and Double Bottom figures in Forex.
- M&W Patterns are among the most commonly used in trading.
- The M Pattern responds to Double Top Chart Pattern:
- The price creates two tops approximately in the same resistance area.
- After the second top, the price action starts a down run.
- If the level at the Double Top Neck Line breaks, this creates further bearish potential equal to the size of the Double Top pattern.
- The W pattern refers to Double Bottom Chart Pattern:
- The price creates two bottoms approximately in the same support area.
- After the second bottom, the price action starts an up run.
- If the Double Bottom Neck Line at the top between the two bottoms breaks, this creates further bullish potential equal to the size of the Double Bottom Pattern.
- Double Tops and Bottoms provide a success rate of about 70%.
- Double Tops and Bottoms give the opportunity to place tight Stop Loss orders, which reduces the risk taken, compared to the potential of the MW pattern.
- Trading MW Patterns in Forex can make you a successful trader.
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