Double tops and double bottoms are some of the most popular price reversal patterns in the Forex market. They show up frequently on 15-minute charts to weekly time frames. Let us define these patterns and see how we can use them.
Double tops
Double top is a reversal pattern that is formed on the top of an uptrend. This reversal pattern is formed when the price reaches some strong resistance level and is unable to break this level. After the first try, the price rolls down, but soon it comes again to test this level. If the price pulls back from the resistance level for the second time, then a double top is formed. It is as simple as that.
After a strong upward movement, you will notice in the chart two peaks or tops, which is a reversal pattern. Please note that when making a second upward movement, the price is not able to break through the level of the first peak. This is a strong signal of a trend reversal, because the chart indicates that buying pressure eased. If we would decide to open a short position, we would have placed an order to sell below the intermediate support line, because the breakdown of this line shows a trend reversal.
Generally, between the peaks, there must be at least 6 candles, to visually look like two peaks or lows rather than just two or three adjacent candles. But at the same time keep in mind that if the second peak is far from the first one, such a structure is not a pattern at all, it’s just a coincidence. A correction is possible, but not a reversal.
If you learn the aspect of double tops, you will know in advance where the price will go in such situations. After the breakdown of the intermediate support line, there is a trend reversal and the price begins to decline rapidly. You should remember that double top is a trend reversal pattern, so, in order to find a model, you need to find a strong upward trend.
Double Bottoms
Double bottom of a Forex trend is also a pattern of trend reversal, but when we notice this on the chart, we should buy instead of selling. These reversal candlestick patterns occur when the market is bearish, and we notice a downtrend during which there are formed two bottoms. After a formed downtrend, the price forms two bases, because it stumbled upon some strong support. It has the same principle with the double top. In fact, the double bottom is a mirror image of a double top, and you also have to look for it when the market has a strong downtrend.
Double bottom trading principles
- According to the classic trading rules, the transaction entry should be carried out after the intermediate support line confirmation.
- Take-profit is equal to the distance from the minimum to the temporary maximum.
- The stop-loss is established under the last low, or it can be set using the Fibonacci retracement levels from the recent low.
The same can be said about double tops, but at this time in upward trends.