The Traders’ Psychology Behind Double Tops And Double Bottoms Chart Pattern

Sometimes I like to think of trading as a game of spotting support and resistance levels on price charts only to consequently bet on the possibility of say, currency prices with respect to the forex market halting, reversing or sometimes even breaking through these decision levels discounting some form of externally acquired data examples of which could be some political/news event as represented through the in - flow of orders painting traders psychology as price action unfolding on currency charts using the artistic visuals of candlesticks.

Trading with this thought approach you’ll agree with me that price isn’t actually the representation of the value of any currency against another but instead a representation of traders’ perception of the value of the currencies that should be, assuming we agree with John Allen Paulos’ sluggish market hypothesis in his book “A Mathematician Plays the Stock Market.”

Double Top and Double Bottom Formations from a psychological point of view only represent the inability of the bulls/bears to keep up the steam and momentum of the price trek up or down taking prices beyond their previous difficulty levels so to say, forming a somewhat M or W illustration on the trading charts when viewed through a line graph on currency charts.

A Support Level also known as a floor is that price level where buyers begun bidding prices higher due to the ever increasing demand for the base currency whose chart you happen to be studying say the euro on the EURUSD chart.

A Resistance Level on the other hand which called a ceiling represents that price level where for simplicity sake the euro bulls profiting from the rise of the euro face some sort of fear that their euro long positions could be affected it to by the impending swoon affecting their floating profits which could even plunge them headlong into losses might make the savvy minority of pro traders with the mega bucks take some profits off the table resulting in an aggressive sell that disrupts the demand for the euro causing a downward move on the chart, don’t be fooled, the gravity law also applies to forex trading, prices have a natural tendency of falling faster than they rise maybe what we should likely call the fear factor (season 1), oh sorry only fear factor it’s not a TV show, my bad.

A Double top formation looks like an M on currency trading chart when you switch to line graph view inside yourforex trading platform telling you a lot about the current external market psychology i.e. the collective opinion of traders regarding the value price of that particular currency as actively discounted into the market.

To really appreciate the sell setup your forex trading strategy offers to you due to the negative MACD divergence signaling a slowing momentum of the flow of buy orders from traders caused by the reluctance of bull traders loading up the boat with regards their bullish trading positions because of the constant reminder very visually prominent on their charts where buyer failed to break to the upside as shown with the resistance level which we assume to be a .00 psychological level say 1.3100 is the price.

This further proves why this level is likely to act as support again supporting the MACD indicator which told us that less and less traders are willing to buy just yet. The subsequent formation of a hanging man candle stick which was later followed by a change of direction candle not only gives a strong sell signal but also paints the psychological picture in the traders mind of something like a movie story ingested from the chart really justifying the sell trade opened as opposed to just selling because the xyz indicator doing zyx.

Trading like this only make trading fun, exciting and really worth the sacrifice even though I trade for less than 2 hours a day whenever I do which is really often as I happen to be a full time trader it always feels like watching an adventure movie, you could too but only when you start trying to decode what price is telling you and not superimposing on it what some indicator thinks it should do, this you have to follow up with a lot of practice forex trading on a demo account.

Even though most forex brokers only supply us visual information of traders activity with candlesticks on a chart absolutely free which happens to be very generous of them, to trade successfully you must somehow reestablish the connection that this candles only show you what real people, by real people I mean other traders like yourself and myself are doing giving the information they ingest from external sources like news or political event through their favorite trusted online sources or carefully executed technical analysis and not just some software people click to buy or sell currency only to make or lose money extremely fast.

Trading currencies really isn’t rocket science as many people are forced to believe, yes there are lot of things that contribute to the success of any person as a forex trader, what I’d like to point out to is the fact that it is 100% achievable but only if you are ready to put in the work, you have to learn forex trading the right way else your dreams of trading for a living just wouldn’t happen.

Learn some new concept, strategy or methodology you want to add to your forex trading arsenal? Test it out on a demo account; interact with your peers with your peers in trading forum and trying teaching one or two friends of yours in some skype group teaching others helps you learn and understand what you’re trying to teach a lot faster than working it out in your mind endlessly.

Hope you enjoyed this article, don’t forget to share it with your friends, I look forward to hearing your comments and answering your questions. Cheers…

Article Source: http://www.streetarticles.com/day-trading/the-traders-psychology-behind-double-tops-and-double-bottoms-chart-pattern