Double top chart patterns
Double top chart patterns (together with double bottom patterns) are one of the most common and loved chart patterns among forex traders.
They are reversal patterns that often appear following an extended up trend. The tops are the highest points that are formed when price is repulsed by a resistance level that cannot be broken.
After failing to break this level, price will bounce off it moderately, but then goes back to test the level once more.
A double top chart pattern is formed when price bounces off that level once more; that is “two tops”. The support level that price tests before forming the second peak is called the neckline.
Double top chart patterns can be spotted on charts of all time frames. However, they tend to provide a more powerful trading signal when they appear on longer time frames such as daily charts, particularly after a strong upward move.
We usually confirm the formation of this chart pattern when we see price falling from the second peak and going down below the neckline. If this takes place, then we usually expect price to move further downwards.
As it is illustrated in the diagram above, a double top chart pattern is typified by a move to a new high followed by a slight pull back to the neckline or support level and then a second move to the second high.
Note how the second top did not manage to break the high of the first top. This is a convincing indication that a reversal is about to take place, as it informs us that the bulls are starting to give up the fight to their counterparts, the bears.
It is of essence to note that the second high is nearly equal to the first high. And, it may stand out to be a major resistance level.
When the second peak is a bearish candlestick reversal pattern, it can give you more reasons for entering a trade.
How is the double top pattern traded in forex?
Trade entry
Enter short (sell) position below the neckline when the price of the currency pair breaks from its second peak and goes below the neckline.
Stop loss
You should place your stop loss order some distance above the second peak. We have experienced that in some instances, price usually pulls back after breaking the neckline. Therefore, you may wait to enter a short position at little higher level, when price pulls back upwards a little.
Profit target
You should set your take profit level at approximately the same height as the double top formation. For example, if the distance between the neckline to the level of the two peaks is 120 pips, your profit target should be 120 pips downwards, or more.
The diagram below adds weight to the above explanation.
Double bottom chart patterns
Double bottom chart patterns, just like double top, are trend reversal patterns and are among the widely used in spotting profitable trade opportunities in the forex market.
These patterns usually appear after strong downtrends when two consecutive valleys or bottoms of same or nearly the same height have been formed.
The bottoms are the lowest points that have been formed when price is unable to break the support level.
Double bottom chart patterns are usually seen on charts of all time frames. Nonetheless, they tend to give more indications of trend reversal when they are spotted on longer time frames such as daily charts, mostly after an extended downtrend.
To confirm the validity of this pattern, we usually wait for price to go up from the second bottom and go over the neckline. If this occurs, then we often expect price to move further upwards.
As the above diagram clearly demonstrates, a double bottom chart pattern is characterized by a move to a new low followed by a moderate pull back to the neckline or resistance level and then a second move to the second low.
Notice that the second bottom lacked enough strength to break the low of the first bottom. Thus, this is compelling signal that a trend reversal is about to occur, as it informs us that the bearish pressure is waning.
It is also worth mentioning that the second low is almost equal to the first low and it may prove to be a major support level.
When the second bottom is a bullish candlestick reversal pattern, it can give you more reasons for entering a trade.
How is the double bottom pattern traded in forex?
Trade entry
Enter long (buy) position beyond the neckline when the price of the currency pair moves from its second bottom and goes above the neckline.
Stop loss
You should place your stop loss order some distance below the second bottom. Experience has taught has that price often pulls back after breaking the neckline. As such, you may wait to enter a long position at little lower level, when price pulls back backwards a little.
Profit target
You should go for a profit target that is nearly the same as the height of the double bottom chart pattern. For instance, if the distance between the neckline to the level of the two bottoms is 120 pips, your profit target should be 120 pips upwards, or more.
The diagram below adds weight to the above explanation.
Summary
Double top and double bottom chart patterns are easy to spot when trading forex. And, knowing how to trade them effectively is a profitable strategy that you can add to your trader’s toolbox.
