Forex Chart patterns Part 2
The double Top and Double Bottom
Evan Cabral
November 2
Double Tops And Double Bottoms
Double tops and bottoms are one of the most well-known and powerful money making techniques known by Forex traders. They are a test of a previous high or
low. Triple Tops and Triple Bottoms are similar but have three Peaks or Lows.
A double top occurs when the price attempts to break out above a recent pivot high but fails, this pattern consists of two tops of approximately equal height.
Many traders wait for the confirmation when the retracement low, beneath the two peaks is broken to the downside after the second peak.
When a double top has been formed, the price objective is usually an equal distance down beyond the correction low (valley between the two peaks). Double tops
are not as strong in a strong up trend as they are in a downtrend.
The mirror image of the double top is the double bottom, a bullish formation. Support cannot be established until there is a test of the last point of
support.
Double tops (M shaped) and double bottoms (W shaped) are stronger if the equal points are a long way apart. The two peaks of a double top do not
have to be exactly at the same level so allow a few pips difference. A double bottom with a slightly higher low for the second point can be a strong
bullish signal. Double bottoms are not as strong in a strong downtrend as they are in an uptrend. A double bottom which coincides with a pivot line can
produce a fast move upwards.
The Double Top
1 Prior Trend: With any reversal pattern, there must be an existing trend to reverse. In the case of the Double Top Reversal, a significant
uptrend of several months should be in place.
2 First Peak: The first peak should mark the highest point of the current trend. As such, the first peak is fairly normal and the uptrend is
not in jeopardy (or in question) at this time.
3 Second Peak: The advance off the lows usually occurs with low volume and meets resistance from the previous high. Resistance from the
previous high should be expected. Even after meeting resistance, only the possibility of a Double Top Reversal exists. The pattern still needs
be confirmed. The time period between peaks can vary from a few weeks to many months, with the norm being 1-3 months. While exact pea
are preferable, there is some leeway. Usually a peak within 3% of the previous high is adequate.
4 Decline from Peak: The subsequent decline from the second peak should witness an expansion in volume and/or an accelerated
descent, perhaps marked with a gap or two. Such a decline shows that the forces of demand are weaker than supply and a support test is
imminent.
5 Support Break: Even after trading down to support, the Double Top Reversal and trend reversal are still not complete. Breaking support
from the lowest point between the peaks completes the Double Top Reversal. This too should occur with an increase in volume and/or an
accelerated descent.
6 Support Turned Resistance: Broken support becomes potential resistance and there is sometimes a test of this newfound resistance
level with a reaction rally. Such a test can offer a second chance to exit a position or initiate a short.
Down Below Is an example of the Double Top reversal pattern
The Double bottom
1 Prior Trend: With any reversal pattern, there must be an existing trend to reverse. In the case of the Double Bottom Reversal,
a significant downtrend of several months should be in place.
2 First Trough: The first trough should mark the lowest point of the current trend. As such, the first trough is fairly normal in
appearance and the downtrend remains firmly in place.
3 Peak: After the first trough, The high of the peak is sometimes rounded or drawn out a bit from the hesitation to go back down.
This hesitation indicates that demand is increasing, but still not strong enough for a breakout.
4 Advance from Trough: Volume is more important for the Double Bottom Reversal than the double top. There should clear
evidence that volume and buying pressure are accelerating during the advance off of the second trough. An accelerated ascent,
perhaps marked with a gap or two, also indicates a potential change in sentiment.
5 Resistance Break: Even after trading up to resistance, the double top and trend reversal are still not complete. Breaking
resistance from the highest point between the troughs completes the Double Bottom Reversal. This too should occur with an
increase in volume and/or an accelerated ascent.
6 Resistance Turned Support: Broken resistance becomes potential support and there is sometimes a test of this newfound
support level with the first correction. Such a test can offer a second chance to close a short position or initiate a long.
Down Below an example of the Double Bottom Reversal Pattern
The reason why as traders we look for these specific patterns is
because they repeat themselves, we can look back on the charts
and find these patterns repeating them selves in the past and use
them apart of our analysis for the future
