Technical traders look chart patterns for on historical price charts to help them identify the current supply and demand forces, and how prices may be affected as a result of it. Double tops and bottoms are the most frequently seen reversal patterns which are widely observed and followed by the Forex market participants.
We get to hear the terms “double tops” and “double bottoms” all the time if we are trading currency or are around people who are doing so. Double Tops & Double Bottoms are some of the most common chart reversal patterns in the currency market. There are many Forex traders who prefer to use technical analysis to make trading decisions. Through this article on technical analysis, let us discuss the uses of and implications of the double top/bottom chart pattern.
A double top is a price reversal formed after there is an extended upward move. The “tops” are thus the peaks it achieves when the price hits a level which cannot be broken. After hitting this level, the price will bounce off it a little bit, but then return to test the level again. If the price bounces off of that level again, then you have a DOUBLE top on hand! Likewise in the double bottoms formations, we go long instead of short. These formations occur after extended downtrends when two valleys or “bottoms” have been formed.
The M or W patterns (representing double top or bottom respectively) make an appearance regularly on every chart, whether it’s a 15-minute chart or weekly. Let us dig a little deeper and learn to identify these patterns and use them to our advantage by striking profitable trades in Forex.
Sometimes back a student wanted to know number of candlesticks between the first and second top and bottom to qualify for a valid signal. My opening remarks to this question were candlestick charts were interpreted more for being an art than science. As a result of this there was no fixed hard and fast number of candlesticks that needed to occur between the two tops or bottoms. The bigger the number of candles between the two, the better. The more valid and reliable the pattern will be.
Forex traders should remember that the process or pattern that needs to occur for a valid trading signal is that the price action should touch support for a bottom or resistance for a top and then trade away from that level for a certain length of time and then again come back and test that same level and abide by it. However, the exact time period or number of candles remains a point of discussion.
A good rule of thumb regarding how to identify the two tops or bottoms is that price action when building the double top pattern forms a capital letter “M”. In a double bottom pattern the reverse or the capital letter “W” pattern will be followed. To wind it up, let me tell you that a textbook double top pattern will take place at a new high on the chart while a textbook double bottom pattern will take place a new low.
Let us discuss some practical situations to get a better understanding of these chart reversal patterns. For example, what steps should one take if prices break past the First Resistance Level? See, after the first peak is formed and prices are able to break through the resistance level on the second rally attempt strongly, this means that the double top formation has failed. In this situation the traders are not encouraged to enter into a short position.
Let us now look at the opposite, which is true for double bottoms. What Is the reasoning for double tops?
The first peak will reflect that it is not possible for prices to manage a break through at a particular resistance level. But you will notice that there will be buyers in the market who will be attempting to push prices back up again. Once the market achieves its second peak, it shows that the buyers are not strong enough to push prices further up, wearing them out and thus allowing the sellers to continue pushing prices further down. The reverse is true for double bottoms.
Then there is Triple Top - Triple Bottom price reversal pattern besides the first two discussed above. We will discuss the remaining two in short for basic understanding and by way of covering all the various price reversal patterns.
In the typical triple top formation each one head is approximately the same size. A line of resistance can be drawn connecting the three tops. Then a neckline should be drawn connecting the support levels. Coming to the third head - after the third head, price falls below the neckline. There is a possibility that the market rebounds for a short attempt at breaking back past the neckline to be followed by a new beginning of another downward trend. For all of these kinds of patterns, a trader will be under constant pressure to identify them just as they are shown in their theoretical forms.
Coming to the last one - Rounded Tops/ Rounded Bottoms. The rounded top formation come into being when the market slowly and steadily shifts from a bullish to bearish while in the case of a rounded bottom, it works from bearish to bullish. The prices as a result take on a bowl shaped pattern as the market slowly and in its normal course changes from an upward to a downward trend.
Source: Forexoma.com
We get to hear the terms “double tops” and “double bottoms” all the time if we are trading currency or are around people who are doing so. Double Tops & Double Bottoms are some of the most common chart reversal patterns in the currency market. There are many Forex traders who prefer to use technical analysis to make trading decisions. Through this article on technical analysis, let us discuss the uses of and implications of the double top/bottom chart pattern.
A double top is a price reversal formed after there is an extended upward move. The “tops” are thus the peaks it achieves when the price hits a level which cannot be broken. After hitting this level, the price will bounce off it a little bit, but then return to test the level again. If the price bounces off of that level again, then you have a DOUBLE top on hand! Likewise in the double bottoms formations, we go long instead of short. These formations occur after extended downtrends when two valleys or “bottoms” have been formed.
The M or W patterns (representing double top or bottom respectively) make an appearance regularly on every chart, whether it’s a 15-minute chart or weekly. Let us dig a little deeper and learn to identify these patterns and use them to our advantage by striking profitable trades in Forex.
Sometimes back a student wanted to know number of candlesticks between the first and second top and bottom to qualify for a valid signal. My opening remarks to this question were candlestick charts were interpreted more for being an art than science. As a result of this there was no fixed hard and fast number of candlesticks that needed to occur between the two tops or bottoms. The bigger the number of candles between the two, the better. The more valid and reliable the pattern will be.
Forex traders should remember that the process or pattern that needs to occur for a valid trading signal is that the price action should touch support for a bottom or resistance for a top and then trade away from that level for a certain length of time and then again come back and test that same level and abide by it. However, the exact time period or number of candles remains a point of discussion.
A good rule of thumb regarding how to identify the two tops or bottoms is that price action when building the double top pattern forms a capital letter “M”. In a double bottom pattern the reverse or the capital letter “W” pattern will be followed. To wind it up, let me tell you that a textbook double top pattern will take place at a new high on the chart while a textbook double bottom pattern will take place a new low.
Let us discuss some practical situations to get a better understanding of these chart reversal patterns. For example, what steps should one take if prices break past the First Resistance Level? See, after the first peak is formed and prices are able to break through the resistance level on the second rally attempt strongly, this means that the double top formation has failed. In this situation the traders are not encouraged to enter into a short position.
Let us now look at the opposite, which is true for double bottoms. What Is the reasoning for double tops?
The first peak will reflect that it is not possible for prices to manage a break through at a particular resistance level. But you will notice that there will be buyers in the market who will be attempting to push prices back up again. Once the market achieves its second peak, it shows that the buyers are not strong enough to push prices further up, wearing them out and thus allowing the sellers to continue pushing prices further down. The reverse is true for double bottoms.
Then there is Triple Top - Triple Bottom price reversal pattern besides the first two discussed above. We will discuss the remaining two in short for basic understanding and by way of covering all the various price reversal patterns.
In the typical triple top formation each one head is approximately the same size. A line of resistance can be drawn connecting the three tops. Then a neckline should be drawn connecting the support levels. Coming to the third head - after the third head, price falls below the neckline. There is a possibility that the market rebounds for a short attempt at breaking back past the neckline to be followed by a new beginning of another downward trend. For all of these kinds of patterns, a trader will be under constant pressure to identify them just as they are shown in their theoretical forms.
Coming to the last one - Rounded Tops/ Rounded Bottoms. The rounded top formation come into being when the market slowly and steadily shifts from a bullish to bearish while in the case of a rounded bottom, it works from bearish to bullish. The prices as a result take on a bowl shaped pattern as the market slowly and in its normal course changes from an upward to a downward trend.
Source: Forexoma.com
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