Tag Archives: technical analysis

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

Trendline Forex Indicator: How to Draw Trendline in Forex

The trendline Forex indicator is an integral tool of the price action in Forex. This material will teach you how to properly apply and trade the Forex trendline.

Trendline Forex Indicator Explained

The Forex trendline is a single line, which outlines one directional price move from one point to another. When the price is following a trendline, this means it is changing its price following a general direction.

Understanding the concept of trends is integral in your ability to make money from the Forex portfolio management. Forex traders attempt to catch trend in order to buy when price is low and to sell when it is high, or the opposite. For this reason, the trendline Forex indicator is one of the crucial tools for boosting your Forex success rate.

Below you will see an example of a trendline Forex instrument:

trendline forex indicator explained

This is a 5-munte chart of the EUR/USD. The blue line indicates a Forex trendline indicator, which measures a price increase. The black arrows point the moments when the price tests the trend as a support (from below). Every time the price meets the trendline indicator we see an increase in the Forex rate.

We see 11 increases after interaction with the trendline. If you buy the EUR/USD Forex pair in every one of these moments, you will be able to sell on a higher price later. This is how the trendline Forex traders manage to generate profit from currency trends.

How to Draw Trendline in Forex

How draw to trendline in Forex depends on the points you have on the trading chart. Simply take a ray from your Forex trading platform, click on the first edge you see on the chart and then stretch it through the others.

how to draw trendline in forex

Every two bottoms could be connected with a single line. However, if three bottoms could be connected with a single line, then you have a bullish trend (inclined upwards). So you need three bottoms lying on the same line in order to confirm and draw a trend line. The first two bottoms just hint that the trend might be occurring on the chart. If the price creates another bottom on the same line, then you confirm the presence of a real bullish trendline Forex indicator.

Types of Forex Trendline Indicator

There are two types of trendline Forex indicator depending on the direction of the price.

Bullish Trendline Indicator

If the Forex tendency on the chart is bullish, you should use a bullish trendline indicator. You should take the first bottom on the chart, and then you should stretch the line through the other bottoms. The bullish trendline indicator should contain the zones around each of the bigger bottoms.

The two images above are example of bullish trends. If the Forex rate accounts for higher tops and higher bottoms you are looking at a bullish trend.

Bearish Trendline Indicator

If the Forex tendency on the chart is bearish, then you should use a bearish trendline indicator. Take the first top on the chart and stretch the trendline Forex indicator through the other tops. The bearish trendline Forex indicator should contain the zones around each of the bigger tops.

bearish trendline indicator

This is a real example of a bearish trendline indicator. The chart covered is 5-minute of the EUR/USD Forex pair. As you see, the EUR/USD Forex rate on the image above creates lower tops and lower bottoms.

How to Trade Forex Trendline Indicator

The key to making profits from Forex trendline indicator is to find a pre-existing trend and place a trade in the same direction. If the Forex rate has been moving lower for a significant amount of time the odds of it continuing to move lower in the near future are high. Opposite is applicable as well. If the Forex rate has been increasing recently, then the chances that the price will keep increasing are high.

Predicting when a trend is going to begin is one of the main challenges of Forex trading. The earlier you ride a trend the more money you are likely to make.

Due to this, people have devised complex methods to take advantage of trends. When trends are beginning, some use indicators and others use economics in order to support their trading decisions.

It is far easier to jump into a pre existing trend than it is to try and figure out when a new trend may begin. Trying to find the beginning of a trend may lose you a lot of money.

By jumping into a trend after it has already begun your sacrificing a little bit of potential profit for a higher probability trade. Opposite to this, by jumping into potential trend, you increase the potential profit of the trade for a lower probability trade.

Forex Trendline Trading Example

Now that you know how to draw trendline in Forex and how to trade Forex trendline, we will switch to a real Forex trend example.

forex trendline trading example

This is the 5-minute chart of the EUR/USD for Sep 8-9, 2016. The three points on the chart should be used to build the bullish trendline indicator. You should stretch the trendline through the three bottoms. Then you should buy the EUR/USD in the moment when the price bounces from the trend line.

Always use a Stop Loss order when you trade Forex trendlines. You should put it below the bottom created in the moment of the third bounce as shown on the image. Then if the Forex rate goes against you, the trade will be protected. Conversely, if you trade a bullish trend, the stop should be above the top you use to open your short trade.

The price increases afterwards. There are four bullish impulses created after the creation of the third top. Every one of these three impulses brings profit to your long trade.

In the red circle you see the moment when the EUR/USD Forex rate breaks the bullish trendline. This is a signal that the bulls are exhausted and the trend is probably finished. Therefore, you should close your long trade in the moment of the trendline breakout. The price difference between the third bounce and the breakout is your profit.

Conclusion

  1. The Forex trendline is an indicator which outlines the price direction of a Forex pair.
  2. Understanding the concept of the Forex trendlines will definitely improve your Forex trading routine.
    • If you enter early into a trend you have the potential to make more money, but this is riskier.
    • If you ride an already existing trend it is safer, but you will make less money.
  3. There are two types of Forex trendlines depending on the currency rate direction.
    • Bullish Forex trendline – takes into consideration the bottoms of the Forex pair
    • Bearish Forex trendline – takes into consideration the tops of the Forex pair
  4. You should use a ray to draw a valid Forex trendline indicator:
    • Bullish Forex trendline – Take the fist bottom and stretch a ray through the other bottoms. The trendline will be inclined upwards.
    • Bearish Forex trendline – Take the first top and stretch a ray through the other tops. The trendline should be inclined downwards.
  5.  You should remember two things trade profitably the Forex trendline:
    • Buy low, sell high.
    • Sell high, buy low.

Author: Christopher Webb
ForexMentorOnline


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

Write Guest Post

Forex Trading: Australian Dollar Presses Higher

With all the news about Brexit, Italy, and Spain many anticipated the Euro to fade and it has for the past couple of months. This pair has been ranging between 1.4 and 1.6 price levels since August last year.  Fundamentally, earlier in the Asian session we saw the Melbourne Institute Inflation expectation recorded at 3.7% in June against 3.5% rise of inflation recorded in May.

This monthly inflation hint gives us a bird’s eye view of what is to come when it comes to matter inflation — which most central bankers are trying to boost by cutting rates to near zero or even negative. We also saw unemployment rate data increasing to 5.8% last month from 5.7% in May with the economy churning out 7.9K jobs against the expected 10.1K jobs.

This reading was less than half of what the economy created in May. Despite the bad news, the Aussie gained momentarily before losing ground against its European currency counterpart.

Forex Daily Chart Analysis:  Euro vs. Australian Dollar

EURAUD Daily chart-14.07.2016.jpg

Forex Trading Chart Source: Easy Markets

Technically, from the daily chart, price action is trending in the 1.4 price level which is our 12-month support and with news like this, I expect the Aussie to cede ground and boost Australia’s Trade balance in the coming months. We expect the price to turn anywhere within the 1.46 and 1.43 price range and confirmed by the stochastics.

If this does turn out to be the case, the price will reverse from the 23.6 Fibonacci level and go by the rule of thumb price might rise back to highs of 1.6. At the moment, we should not look to buy because of that banding of the lower BB which means momentum is still high and there is no reversal or buy signal yet.  Traders are likely to remain neutral for now.

EUR/USD: Bullish Trend and a Rising Wedge – Reversal?

The EUR/USD chart shows us a bullish trend and a rising wedge. Could this be the end of the 2-days bullish movement? Let’s see about that!

Euro to Dollar Trend

We couldn’t skip the fact that there is a 2-days bullish trend by the EUR/USD. Have a look at the image below which shows the H1 chart of the Euro vs Dollar:

EURUSD Bullish Trend
EURUSD Bullish Trend Line on the H1 Chart

The blue line on the image below indicates the bullish activity by the EUR/USD during the past two days. The trend line is 6-times tested which means that the price might have troubles breaking it in first place. Nevertheless we still have some serious reasons to believe that the bullish Euro trend might actually break downwards.

Euro to Dollar Forecast

Let’s now approach the same chart, but with some more information on it:

EURUSD bullish trend, rising wedge
Bullish trend meets crucial resistance

As you see, the blue bullish trend of the EUR/USD currency pair is bringing the price to a meeting with a resistance level. Apparently, this resistance is older than the trend, which adds more credibility to its potential. Maybe the Euro vs Dollar price will change its direction?

Have a look at the red bullish line we placed on the chart. This red line connects few of the last EUR/USD tops. As you see, the red line shows that the last EUR/USD tops are closing lower than the bottoms. This creates a rising wedge figure on the chart.

EUR/USD Rising Wedge

The rising wedge formation has the potential to push the price toward a bearish move. Usually, the size of the upcoming bearish move after a rising wedge is equal to the size of the formation itself. This is shown with the green arrows on the image above.

Yes, the EUR/USD currency pair is moving after a bullish trend. But the resistance the price meets in a combination with the rising wedge formation might be a sufficient bearish pressure for the price to change the latest trend.