Mastery Of Stock Market Intelligence
In my first article on technical analysis patterns I taught you about support & resistance and how to best identify them on stock charts. In this article I will be teaching you about double tops and double bottoms. Before I delve into how these patterns work you need to understand about neckline measurement rule.
Technical Analysis Patterns – Neckline Measurement Rule
Estimating the probable strength of a move can be calculated with the neckline of a pattern. Constant analysis is always advised as the neckline rule does not apply exactly to all the moves. It can be used with a number of patterns and is useful in determining any potential trade.
Long ranges up & down to a neckline dictate volatile bullish and bearish implications. Please note that the target is a potential objective. Prices can often zig zag.
Technical Analysis Patterns – Double Top (Reversal)
Double tops are significant reversal patterns. It is where a high has been reached twice before retracing. This indicates weakness as the stock did not have enough strength to rise above the previous high.
They have a support at the neckline level. This neckline level is the previous low of the stock. When this area of support is reached, the reversal pattern is completed.
When support at this neckline fails, the market is flooded with fear and sellers soon outnumber the buyers.
At this stage the emotions influencing a person to sell are far greater than the emotions influencing a person to buy.
Double tops also occur at the end of a significant up-trend. This faltering lead-in up trend depicts that there are less buyers will to push the price up.
An up-trend can be broken with a double top reversal pattern. This weakening and lack of conviction phase of the stock is a classic trend breaking pattern.
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Technical Analysis Patterns – Triple Top (Reversal)
Triple tops (an extension of a Double Top) are significant reversal patterns, where the stock has attempted to rally on 3 occasions.
It has struggled unsuccessfully on 3 occasions to close above the level of resistance.
Where support at the neckline is reached, we then have the completion of the reversal patterns.
When support at this neckline fails, the stock again is flooded with fear and supply exceeds demand for the stock sending it downwards.
Technical Analysis Patterns – Double Bottom
A double bottom is essentially a mirror images of a double top. It usually occurs at the end of a down trend and forms a base of a support level.
The double bottom is formed when the price cannot move past the support level to form a new low.
You can see the sellers are losing momentum and are unable to push the prices down any further. This is a very bullish signal.
The neckline level is the previous high of the stock. When this area of resistance is reached, the reversal pattern is completed. If the neckline fails, the buyers soon outnumber the sellers and an uptrend is initiated.
Technical Analysis Patterns – Triple Bottom (Reversal)
Triple bottom patterns (an extension of a double bottom formation) are characterized by very strong levels os support. the stock has failed on 3 occasions to close below this particular support level.
Resistance is formed at the neckline. When the neckline fails on heavy volume the buyers soon outnumber the sellers and an uptrend is initiated. (A bullish implication)
These technical analysis patterns are very commonly found on stock charts and understanding these patterns can increase your likelihood of being successful on the stock market.
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Stay tuned for my next article on Head and shoulder patterns.
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To be successful on the stock market, you need to know technical analysis. What is Technical Analysis? Before we jump in and start talking about technical analysis you must understand the Global Financial Markets.
The global financial markets are motivated by fear, greed and indecision and they dominate stock market activity. Fear, greed and indecision influences the price of a security and commodity within the global markets.
Any security or commodity price is a very important statistic in the world of technical analysis. It’s the only accurate measure of psychological investor sentiment. It’s therefore the intersection of supply and demand.
80% of Trading is Psychology
When the stock market is bullish it means that there is more demand than supply and when the stock market is bearish there is more supply than demand.
What Is Technical Analysis
Technical analysis is the study of historical price performance. The traders endeavour is to depict future price movement.
Technical analysis makes the assumption that investor sentiment is at least and possibly a more important determinant of price than fundament factors like earnings, revenues and profit margins.
What is technical analysis? In Short Involves Charting
Technical analysis is about interpreting pictures, known as charts, and using those pictures to chart and depict the roadmap of probable direction of a stock.
The stock market is a never ending battle between those who think the stock price should go down (the bears) and those who think the stock price should go up (the bulls).
While both parties are constantly engaged in this investor battle, the results of their actions are etched clearly and forever on a stock chart.
The investor psychology game between the bulls and the bears has been going on for centuries, leaving us with quite a historical record of how the battles evolve and how they play out.
The fundamental drivers of human nature and behaviour in the stock market have not changed. People are still possessed by fear and greed in the 21st century, just as they were in the 1800′s. There is nothing new in the stock market.
What is technical analysis? – Investor emotions through market cycles.
The image above shows us the investor emotion through market cycles. As you can see when the stock price is going up, investor feels excitement, thrill and euphoria, they are on top of the world think that they are smart and invincible.
When the stock price starts to move down the investor feels the emotions of anxiety, denial, fear, desperation, panic, capitulation and despondency.
Investors go through all these emotions when trading. With technical analysis skills you are able to stack the odds in your favour and increase the likelihood of being in a successful trade.
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