What is The Double Top and Bottom Pattern?
The double top and bottom patterns are some of the most common to be found in the charts. They occur frequently at major levels where the price of the market may be about to reverse direction - for this reason they are called reversal patterns and are used by traders to judge when a market is about to change direction and then profit from it.
In this blog post I will explain exactly what they are and what they show.
Also, if you want to know how to know which pattern to use in which situation, how to correctly identify them and how to enter them, then here is a YouTube video for you...
So, these patterns are found on market charts. They are simply a pattern formed by the movement of the markets.
The Double top is formed by an initial rise of the market. However, the market then stops and decreases, forming the first top. The market then stops decreasing, forming the neckline, and rises again to around the same level as the first top where it again stops. It then reverses again and falls, forming the second top...
The double bottom is simply the reverse of this. So, the market initially falls but then stops and reverses higher - forming the first bottom. The market then stops rising, forming the neckline and reverses once more, this time decreasing. The market then stops again and rises, forming the second bottom...
Why are They Important?
So. it's easy enough to see the patterns and understand how they are formed. However, the question is, why are they important in Fx Trading?
The importance comes from what these patterns show about the sentiment of the market. Let's take the double top as an example.
This pattern shows that the buyers in the market were initially strong enough to push the market higher at the beginning of the pattern. However, the buyers then failed to push the market higher twice, forming a resistance area, and this is the crucial part. What this means is that the buyers in the market are, potentially, running out of steam and sellers may be about to take over.
When sellers take over a market falls and that's why this is a reversal pattern. The importance is also attached to the fact that it was TWICE that the buyers tried to push higher - if it had only been once then it could simply have been a pause before the market moved higher - but twice at the same level shows that the market is not ready to move past that level yet for whatever reason and is more likely to fall again.
In the case of the double bottom it is the sellers in the market that fail to keep up the selling momentum twice, forming a support area, showing that the selling pressure may be about to give out and buyers will return into the market, pushing it higher.
How To Trade The Pattern
There are 2 main ways to enter the double patterns. I go through both of these in my YouTube video, with live chart examples. Before you start trying to trade these patterns on real charts, I highly recommend you check out that video...
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Until next time...