Understanding Forex Charts: Double Tops and Double Bottoms

Double Top and Double Bottom Forex Charts

This article looks at the double tops and double bottoms forex charts.

In order to be a successful trader you must have an understanding of all types of technical analysis and the associated aspects.  One of the most well-known and commonly used trading tools of technical analysis is the double top and double bottom forex chart.  A simple way to think of these charts is that they represent the sum of trader sentiment, as well as re-testing of temporary highs and lows in market movements.

The double top forex chart

The double top forex charts are most commonly found in uptrends where a new high is developed, closely followed by a mild pullback and retest of the high.  This often leads to a failed attempt in passing the price level established by the initial peak.  Results in the movement of prices to a lower level complete the pattern of the double top.

The second peak does not always stopping at the exact price reached by the first peak, but usually ceases at a point quite close to that seen at the first peak.  This double top pattern is generally a representation of a market trend that is weakening where buying interest is on the decline.

Below is an example of the double top forex chart as seen on a chart noting a EUR/USD trade.

The double bottom forex chart

The double bottom forex chart is the opposite of the double top chart pattern.  It occurs during a downward trend and indicates the reversal of the downtrend into an uptrend.  The initial downward movement will note a support level at the first bottom, and then a price action will rally off the support to a temporary high.  Once a selloff occurs, this price action will reach the same support level as the initial bottom and cause another rally in an upwards motion.  Finally, the trend is confirmed when a price breaks through the resistance level completing a role reversal.

Using the same example noted in the description of the double top forex chart, below is an example of the double bottom forex chart for a EUR/USD trade.

Reaction or anticipation?

When trading on the foreign exchange market, one must always choose between a fundamental forex strategy and a technical forex strategy.  Both are effective, despite arriving at the profitable trade utilising different means of analysis.

One difficulty seen among many new technical traders is that the chart patterns always look obvious in retrospect, but seem confusing when dealing with them in the moment.  There are two methods to approach this particular problem which will be detailed below.

1. Anticipate the formations

This method looks at the trader anticipating the potential pattern of the price movement.  It is a risky movement and should only be undertaken by traders who are confident enough in their own abilities.  There is the advantage of getting into a trade before others, but the risk of loss is much greater with this strategy.

2. Waiting for a reaction

This method is best suited to reaction traders who wait to see confirmation of market patterns before entering a trade.  They base their entry on established data; however, there is the chance that they may enter the trade too late to incur a profit.

 

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