"M" Pattern Have To Be In The Right Location To Be Effective

According to Investopedia.com, double top and bottom patterns are chart patterns that occur when the underlying investment moves in a similar pattern to the letter "W" (double bottom) or "M" (double top). Double top and bottom analysis is used in technical analysis to explain movements in a security or other investment, and can be used as part of a trading strategy to exploit recurring patterns.

I’m known as a Supply and Demand Trader. The premise of supply and demand trading is when the market makes a sharp move up or down the large institutions i.e banks/hedge funds are not able to get their entire trade placed into the market, leaving pending orders to buy or sell at the zone with the expectation the market will return to the zone and the rest of their trading position will be filled. But within the supply and demand zones, my entries are made off of “M” and “W” patterns.

I came across a really good article that gave a great example of a “W” pattern. What was cool about the article was, initially I had no idea what Inphi does, meaning “M” and “W” patterns can be used on any asset class.

During the first leg down, the stock price bottomed at 69.07 on Feb. 28 (1). After a brief rebound, the stock plunged back through its long-term 200-day moving average, eventually bottoming out at 55.72 on March 23 (2). Remember, the second low needs to undercut the first low to create a proper double bottom.

On April 6, Inphi was one of the first stocks to break out past a new buy point, following the April 2 follow-through day. On the breakout day, Inphi stock soared past an 84.57 buy point (3), rising more than 9% and ending the session in a buy zone that topped out at 88.80. A flaw was a lack of huge volume on the breakout; heavy volume didn't appear until days later.

But a surging relative strength line (4) offered a sign of tremendous strength. Over the next few sessions, shares quickly became extended.

Source

According to Investopedia.com, double top and bottom formations are highly effective when identified correctly. However, they can be extremely detrimental when they are interpreted incorrectly. I how interpret this as the “M” and the “W” pattern must be in the right location before making a trade.

For example, here are two "W" patterns on the SPY on the 5 min chart, but is it in the right location?

Multiple time frame analysis follows a top down approach when trading and allows traders to gauge the longer-term trend while spotting ideal entries on a smaller time frame chart. Multiple time frame analysis is simply the process of looking at the same pair and the same price, but on different time frames.

When pulling back to the 4 Hr time frame, it just so happens that those two "W" patterns just happen to be in the right location, near the 4 Hr demand zone.

This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.

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