Tag Archives: Forex Chart Patterns

MW Patterns in Forex: Double Top and Double Bottom

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.

M Pattern Double Top Chart 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.

W Pattern 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.

Conclusion

  1. MW Patterns refer to Double Top and Double Bottom figures in Forex.
  2. M&W Patterns are among the most commonly used in trading.
  3. 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.
  4. 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.
  5. Double Tops and Bottoms provide a success rate of about 70%.
  6. 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.
  7. Trading MW Patterns in Forex can make you a successful trader.

Want to write your own Post at Sir Forex?
Click on the button below and start right away!

Write Guest Post

Expanding Triangle Chart Pattern in Technical Analysis

Triangles are among the popular chart patterns in Forex trading. They are all related with specific potential that could be traded. Today we will pay attention to a triangle pattern that is more special than others – the Expanding Triangle chart pattern.

What is Expanding Triangle Chart Pattern

The different in the Expanding Triangle chart pattern is that it is a mirror image of the standard triangle. In this relation, the Expanding Triangle pattern starts narrower and ends wider. Otherwise, the pattern could be taken pretty much the same way as a standard triangle.

Expanding Triangle Pattern Rules

There are three types of Expanding Triangle in Forex based on the potential of the pattern.

The bullish Expanding Triangle is inclined downward and it represents a slowdown of the previous bearish trend. The expansion of the tops and the bottoms of the triangle represent the increase of the price volatility, which suggests that the pattern will break. As a result, the price is expected to break through the lower level of the pattern and to decrease.

The expected drop is likely to reach a minimum equal at least to the vertical distance between the upper and the lower level of the Expanding Triangle in its widest part.

Take a look at this example:

Expanding Triangle Chart Pattern Example

This is a real Expanding Triangle pattern on the EUR/USD chart. The blue lines on the chart outline an Expanding Triangle that is inclined upward. This means that the pattern has bearish character.

Notice that the Expanding Triangle on the image looks like a gradual slow down of the previous Forex trend because its bullish intensity is lower compared to the prior price action. This is why the pattern above hints that the bullish activity might be to its end.

In the red circle we see a breakout through the lower level of the pattern. This is the confirmation that is needed to confirm its potential.

The pink arrows on the chart measure the size of the pattern and apply it downward as a minimum target starting from the moment of the breakout.

In the green circle you see the moment when the price completed the potential of the pattern.

Expanding Triangle Types in Forex

Above we discussed the bearish version of the Expanding Triangle. However, there are two more types known in Forex trading.

The Expanding Triangle pattern has a bullish version as well. It looks absolutely the same as the bearish pattern, but upside down. In this relation, the pattern has decreasing tops and bottoms that start narrower and gradually get wider. The bullish Expanding Triangle is expected to break through the upper level, creating bullish potential equal to the vertical distance between the two levels of the pattern in its widest part. Then again, you take that distance and apply it  upward as a new target starting from the moment of the breakout.

The third version of the pattern is the neutral Expanding Triangle. This type has tops that are increasing and bottoms that are decreasing. This makes the pattern look more horizontal. You cannot tell where the pattern will break through and what potential it will create, which makes it neutral. However, whenever you discover a breakout through the upper or the lower level, then there is a big chance that the price continues in the same direction. Then you can simply apply the size of the pattern as a minimum target starting from the moment of the breakout.

Forex Head and Shoulders Pattern Trading

Chart figures are an essential part of technical analysis in Forex trading. One of the most commons figures in trading is the Head and Shoulders chart pattern, which frequently appears on the currency charts. Once you learn how to recognize it, the Head and Shoulders pattern will be a good addition to your Forex toolbox.

What is Head and Shoulders Pattern

The Head and Shoulders is a specific chart formation that has reversal character. The name of the pattern comes from its shape – it really looks like two shoulders with a head in between. The figure starts with a top, a second top that is higher, and a third top that is approximately at the same height as the first top.

The pattern usually appear during bullish trends and it symbolizes the slowdown of the price increase. As a result, in most of the cases the Head and Shoulders chart pattern is expected to reverse the bullish trend leading to a price drop. This drop is actually what worth trading.

Head and Shoulders Chart Pattern Rules

The Head and Shoulders pattern rules suggest that the figure is likely to cause a price decrease equal to the size of the pattern. To measure the size of the pattern you should first draw a line between the two bottoms that are located in the base of the head. This line is called a Neck Line. Then, you should measure the vertical distance between the tip of the head and the Neck Line. This is the size of the pattern.

Your trading signal on the chart appears in the moment when the price breaks the neck line in bearish direction. If this happens, you can take the previously measured size of the pattern and apply it downward starting from the moment of the breakout through the Neck Line.

Head and Shoulders Chart Pattern

The image above shows a bullish trend marked with green. The blue lines on the image show a Head and Shoulders pattern, which appears during a trend breakout. Notice that after the trend break, the Trend Line turns from a support into a resistance. This gives additional strength to the pattern potential.

The size of the pattern, the target, and the Neck Line are marked with pink. The green circle shows the moment when the pattern is fully completed.

Type of Head and Shoulders in Forex

There are two types of the Forex Head and Shoulders. The example above shows a real and successful Head and Shoulders pattern on the EUR/USD chart. As you saw, it has strong bearish potential.

However, the pattern has its reversed equivalent – the Inverted Head and Shoulders pattern also known as Inverse Head and Shoulders. It looks absolutely the same as Head and Shoulders, but upside down.

In this relation, the Inverted Head and Shoulders pattern appears during bearish trends. It starts with a bottom, a second bottom that is lower, and a third bottom that goes approximately at the same height as the first bottom.

Same trading rules apply as with the Head and Shoulders, but in bullish direction.

Falling Wedge Pattern in Forex Trading

The Falling Wedge pattern is a chart figure with triangular shape. However, it is specific with its inclination and potential. Therefore, it deserves special attention when analyzed technically in Forex trading.

This material will help you understand the Falling Wedge pattern as well as its twin brother the Rising Wedge.

What is Falling Wedge Pattern in Forex

The Falling Wedge is a bullish pattern with a triangular structure. The pattern consists of decreasing tops, and bottoms that are decreasing with lower intensity. In this relation, the figure really looks like a wedge that is falling.

The pattern usually appears during bearish trends and it represents the slowdown of the bearish activity. However, the Falling Wedge chart pattern could also appear during bullish trends, where it is called a Pennant. In each of these two cases the pattern has bullish potential.

Falling Wedge Trading Rules

As we said, the potential of the Falling Wedge pattern is bullish. But the best thing is that the pattern suggests exactly for how long the increase could continue.

First, we should say that the confirmation of the pattern comes when the price action breaks the upper level of the Falling Wedge. This hints that the price is probably reversing. If the confirmation breakout occurs, you have sufficient reason to believe that the pattern is valid and to trade its potential.

The potential of the pattern itself suggests that the price could increase to a distance equal to the vertical size of the pattern in its widest (leftmost) part.

See the example below:

Falling Wedge Chart Pattern

The image above shows a real Falling Wedge on the EUR/USD chart. See that the image begins with  a bearish trend that gradually grows into a Falling Wedge.

In the red circle you see the breakout through the upper level of the pattern, which confirms its identity.

The pink arrows measure the size of the pattern and apply it upward starting from the moment of the breakout as a minimum target.

In the green circle you can see that the pattern is successfully completed.

Types of Wedges in Forex

There are two types of wedges in Forex trading technical analysis. The one you saw above is the Falling Wedge pattern. However, there is another wedge – the Rising Wedge.

The Rising Wedge a mirror image of the Falling Wedge. It consists of increasing tops and bottoms, where the bottoms increase with higher intensity. In this relation, the pattern looks like a wedge that is rising.

The potential of the Rising Wedge is bearish and it is measured the same as with the Falling Wedge pattern. Its minimum target equals to the size of the pattern in its widest (leftmost) part. This target is applied downward starting from the moment of the breakout through the lower level of the Rising Wedge.