If you can see how an opponent behaved in the past, you can figure out how he’ll play in the future. In poker, history repeats itself. And it’s the same in financial spread betting.
Many traders believe they can predict where the markets will move, because the human beings doing the buying and selling tend to behave in the same patterns.
So, traders look for ‘chart patterns’ to help them predict where the price is going to move. These patterns have their own, weird names. There’s the three blackbirds. The sleeping baby. The cup and handle.
The trick is learning to spot these patterns – and knowing what they mean.
Here’s four of the most common charting patterns…
Pattern #1 – Double Top
Here’s a double top. It looks a bit like the letter M.
First, the price hits a high. Then, it dips back as people take their profits. Finally, bullish traders try and fail to surpass the first high. This failure to rally a second time is important – it means that the bulls have been beaten and the bears are now in charge!
What does this mean for you?
Well, a double top is a strong sign the uptrend is over – and the price is about to fall. Some traders believe this pattern can signal a likely down move. Many traders go short when they see a double top. They see it as a great opportunity to make money with a downwards bet.
Pattern #2 – Double Bottom
Recognise this? It’s the double top – only upside down. Just like the double top tells you when a market is about to fall, the double bottom indicates when the market’s about to rise.
In a double bottom, the price comes out of a decline, but fails and falls back again. It tried a second time, and fails again. When the price bounces back past the two peaks – that’s when you know you’re seeing the start of an uptrend.
When investors see a double bottom, they scramble for the buy button. They see it as a strong indication the market is set to rise further.
Pattern #3 – Heads and Shoulders
Can you see why this is called the head and shoulders?
Basically it’s a series of peaks. where the two on the outside (the shoulders) have roughly the same value while the middle summit (head) peaks significantly higher.
Some investors believe this is an indication (not as strong as the double top) that the market is set to fall.
The head-and-shoulders pattern is probably the most widely recognized of all the patterns.
Head and shoulders is a great moment to sell.
Pattern #4 – Reverse Head and Shoulders
Yep, you guessed it. The reverse head-and-shoulders pattern is the head-and-shoulders – but with a dip instead of a head.
The reverse head-and-shoulders can be seen as a good indication to buy.
It shows classic crowd behaviour. First, the price falls to a trough and then recovers. Them the price falls into a second – deeper – trough, and then recovers. Finally the price falls again, before taking off.