Important Chart Patterns
A double top is a reversal pattern that is formed after there is an extended move up.
The “tops” are peaks which are formed when the price hits a certain level that can’t be broken.
After hitting this level, the price will bounce off it slightly, but then return back to test the level again.
If the price bounces off of that level again, then you have a DOUBLE top!
The double bottom is also a trend reversal formation, but this time we are looking to go long instead of short.
These formations occur after extended downtrends when two valleys or “bottoms” have been formed.
Head and Shoulders
A head and shoulders pattern is also a trend reversal formation.
It is formed by a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder).
A “neckline” is drawn by connecting the lowest points of the two troughs.
The slope of this line can either be up or down. Typically, when the slope is down, it produces a more reliable signal.
Inverse Head and Shoulders
The name speaks for itself. It is basically a head and shoulders formation, except this time it’s upside down.
A valley is formed (shoulder), followed by an even lower valley (head), and then another higher valley (shoulder). These formations occur after extended downward movements.