This week I'm going to run through technical analysis and some important chart patterns which may show that a trend reversal is about to occur.
When using charts, there are some patterns which are explosive. We're going to run through a few of the most important ones today.
Let's start by having a look at a double top.
Share prices tend to trend up, down or sideways. When shares are trending strongly, a double top or bottom is often a reversal signal.
What does that mean in English?
When a share is going up and you see a double top. It means that the uptrend may have ended and it may start going down again.
So what does a double top look like? Let's have a look at CBA:
This is a weekly five year chart.
You can see that shares prices trended up until the end of 2007. At the top of that trend you can see a double top. It looks like the letter M. The first peak occurs, then the share price tries to hit that mark again, and it misses.
You can see why it's called a reversal pattern, because the trend often reverses.
If a double top looks like an M, a double bottom would be a W.
A double bottom is also a reversal pattern and could signal that a downtrend is ready to reverse.
Let's look at an example, this time with LGL:
If you see a downtrend and then this double bottom, it could be that the trend is ready to reverse. Take a look at this chart. LGL was trending downwards before that double bottom, which signalled a turnaround in the share price. That's when the share price started to reverse and move up.
These signals aren't always right and you can even get false signals. The point is not to be right 100% of the time but to recognise that there are patterns in the market that tend to happen over and over again. While they may not be right 100% of the time, for traders they are an important warning sign that something explosive might be about to happen.
It's a useful tool if you want to improve your timing into and out of investments.
Happy trading!
Julia Lee Equities Analyst Bell Direct
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