t2 university

Basic patterns

When talking about patterns there are a host of different formations we could talk
about. There are head and shoulders patterns there are triangle patterns, wage pat-
terns cup and handle the list goes on and on. But we continue our conversation from
market dynamics. I want dueled on the principle of training continuation and talk a
little bit about what happens when the market reaches a point of exhaustion.

It doesnt matter whether youre talking about a bull continuation pattern or a bear
continuation pattern at some point the market is going to reach a level of exhaus-
tion. If were in a bull continuation pattern this will be the point at which there are
not enough buyers left to dominate the market.

As profit takers move in and sellers begin to dominate we see a reversal in the chart.
Most traders think these are extremely hard to predict. This is why you hear so many
people say dont try and pick tops and bottoms. While it is certainly good advice
to never try and pick the absolute high or low the idea that you cannot determine
where markets are likely to reverse is simply false. For a trained technician the
signs of a reversal are quite clear and can be easy to predict.

In this section were going to cover one of the most basic reversal pattern setups in
the market, the double top and double bottom.

Double tops

A double top simply put is an area where market finds initial resistance has a pull-
back and then retests the same level again. Many traders have issues identifying
exactly what constitutes a double top. During our practical application were going
to cover a very simple way to identify double tops and some practical techniques to
trade them.

Lets take a look at some charts with double tops so we can start training our eye to
recognize the pattern.

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 Example 2.1

Both of these examples you can see a clear, symmetrical double top. This means
both tops touch the exact same level, almost to the pip. In example 2.2 you see how
effective a pattern this can be as the market takes a nose dive after the double top
completes

Example 2.2

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 Example 2.3

In some cases double top is less obvious as is the case with this AUDUSD trade. The
2nd test pulled back significantly leaving you with what would be classified as a
doji or pin bar. These trades are harder to spot but this would still be classified as a
double top.

Double Bottoms

If you understand double tops then double bottoms is a no brainer. They are simply
an inverted double top. In this instance a market has been selling off and reaches
a point at which there are no more sellers. Traders begin to take their profit and
then buyers come back. There is a struggle around this area of congestion and for
a short time we dont know if the bear continuation will continue or if the market will
reverse.

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Example 2.4

It is extremely important to note that double tops and bottoms by themselves are
not necessarily good indicators of market reversal. I know that might sound odd
since we just spent time looking at examples when it works, but there are many
more times when it doesnt. Only when we combine these patterns along with
structure support and resistance do we begin to get a clearer picture of where
trends are likely to begin and end.

If you add in knowledge of Fibonacci, ratio analysis and market harmonics you begin
to get a very clear picture of what the market INTENDS to do. It is the intent that
you as the trader must predict. It does know good to identify why the market has
moved after it does. This is the job of pundits and talking heads on TV. The only
way you will be successful in trading the market is to accurately predict with the
market WILL do, not what its already done.

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