Resources for Forex Trading
CHART PATTERNS
Page 4
The Double Top and Bottom:
One of the most common chart patterns in trading is the double top/bottom. This pattern appears so frequently on the charts that it alone could easily serve as evidence that price action is not as wildly random as many claim. As mentioned previously, one way to look at price charts is that they are simply an expression of the overall sum of traders sentiment/bias. The double top/bottom in particular represent a re-testing of temporary lows and highs also known as support and resistance.
The double top:
Double tops are usually found during an uptrend in prices where a new high is formed, followed by a pullback and a retest of that high. The retest of the initial high fails to surpass the price level established by the first peak, therefore price bounces/rejects the resistance level, often appearing on the charts in the shape of an 'M'. The second peak does not have to stop exactly at the price reached from the first peak but should be relatively close. This pattern is usually indicative of a trend that is weakening where buying interest is decreasing as shown below.
After a confirmed signal to take a short trade from the double top formation, the neckline acts as a firm target. Always be aware of the bigger pictures directional bias presented by the overall timeframes.
A double top indicates a key selling opportunity by showing us clear barriers in price, which has trouble breaking. The market will rise to a strong key level of resistance twice, with the second time forming a clear bearish candlestick formation bringing with it a chance of reversal to the downside.
After the initial rejection from the resistance key level the price will tend to fall and create a base known as the ''Neckline'. The price will then have a second attempt at testing the same level of resistance, which is the highlighted n strip in the image below. Often, the price is seen to spike above the resistance, creating a new high if the prevailing trend is bullish. Double tops frequently provide the highest chance of reversal at weekly and monthly levels of resistance on the Daily or H4.
