Professional traders kill amateur traders in the stock market with double top and bottom patterns. Do not be another victim. In fact, after reading this article you will be able to get the revenge you deserve.
All stock market rallies reach a point where bulls say, ok, I’ve made enough, I’m going to sell and take profits. When this happens, charts will top out when not enough new bulls are coming in to offset their profit taking.
Traders who just bought the stock are pissed off because they came to late. They are trapped, sometimes even in a Bearish Island Reversal. Should they just stay in the stock and hope it comes back or sell for a loss? Well, the stock will keep dropping until enough bulls decide that the stock has over extended itself on the downside. So as more and more of these bulls step in, the stock begins to rise and the rally continues. Now when the stock finally rises back up to its previous high, you can expect sell orders to hit the market as those who were trapped exit their positions.
Many battle scared traders who got caught in the previous decline take a blood oath to get out if the market gives them a second chance.
A mirror image of this situation occurs in the stock market at market bottoms. The market falls to a new low at which enough bears start taking profits by covering shorts and the market rallies. Once that rally stalls out and prices start sinking again, all eyes are on the previous low-will it hold? If bears are stronger than bulls, prices will break below the first low, and the downtrend will continue. If bears are weaker than bulls, the decline will stop near the old low, creating a double bottom. Technical indicators help decipher which of the two is more likely to happen.
Whenever you see a stock climb to its previous high, the first question in your mind should be will the stock climb to a new high or form a double top and head back down. Technical indicators like the RSI, MACD, and volume are very helpful in answering this question.
If a stock climbs to its previous high, if the volume, MACD, and stochastics are dropping then a double top is likely to form.
A double bottom is most likely to form if the MACD and volume start rising when the stock hits its previous low.
By Sean Phelps. I hope this lesson helps you make a lot of money. For more FREE money making tips visit the most popular stock trading blog on the web by going to stock market
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