L
et’s start with our first chart pattern, which can easily be noticed.
Double tops and double bottoms. Does it sound like somebody wants you to drink your double malt whiskey till the bottom of your glass?
Actually, it could mean the same thing in Forex.
If you get yourself to drink such a shot in a bar, you will see a reversal from your sober condition to your drunk one. At some point you will feel fine (have a peak) but soon after that you will reach the support level of the chair, while grabbing it to not fall further down.
In Forex market if you see a double top or double bottom chart pattern appears, a trend reversal has started.
Typically, the price will experience a peak, before retracing back to a level of support.
Peaks are formed when the price hits a level, which can’t be broken. They are called tops.
Then from that support level it will go back once again before reversing back more permanently against the prevailing trend.
The second time the price bounces off of that level will mean that you have a DOUBLE top!
As you can see the two peaks or “tops” were formed after the price was on a strong move up.
The important detail here is that you need to detect the fact the second top was not able to reach and break the high of the first top.
Translated from chart language, it will mean you have a strong sign that a reversal is going to appear because the buying pressure will be over soon.
When we have a double top, we place an entry order below the neckline because we are awaiting a reversal of the uptrend.
Close your eyes, count until 3 and open them!
The rabbit is out of the hat and our magic worked. We were right that the price would break the neckline and drop further down.
Another thing that should leave an impression is that the drop has approximately the same height as the double top formation.
This can be useful in setting profit targets.
Remember that double tops are a trend reversal formation so you’ll want to look for these after there is a strong uptrend.
Double Bottom
You will see a double bottom chart pattern when there is a strong downward trend, causing the price to drop below a level of support. Afterwards the price will go up and reach the level of resistance, before dropping again. Finally, the trend will reverse and begin an upward motion as the market becomes more bullish.
Two “bottoms” have been formed.
Simply, a double bottom indicates a bullish reversal pattern, meaning that the end of a downtrend is coming and there will be a shift towards an uptrend.
When such formation occurs, you need to go long instead of shorting like in double tops.
You will see in the chart above that there was a downtrend and the price formed two “bottoms” because it wasn’t able to go below this level.
So the second bottom couldn’t reach the price of the first bottom.
This is a clear indication that a reversal is going to happen soon.
It is almost like we are magicians and we know what these trends are gonna do. We guessed right again and the price broke the neckline on its way further up.
See how the price jumped by almost the same height as that of the double bottom formation?
If you want to be a magician one day, remember this trick: Always look for double bottoms after a strong downtrend and if you see them, it will mean that a reversal is coming.
