Double Tops and Double Bottoms chart patterns help traders identify solid bullish and bearish trend reversals in the forex market, and in turn, find the ideal market entry and exit points. These charts also enable traders to predict future price movements more accurately and make better trade decisions. In this article, we discuss how you can trade with the Double Tops and Bottoms chart pattern.
What is a Double Tops chart pattern in forex?
A Double Tops chart pattern is formed when there are two consecutive steep price increases, also known as tops, in the forex market. The first top is formed like an inverted U pattern, followed by the second top that indicates a bearish trend reversal. The double tops formation signals a market sentiment of traders and investors obtaining profits from a bullish trend before the prices start falling.
What is a Double Bottoms chart pattern in forex?
A Double Bottoms chart pattern is formed with two consecutive steep price falls, also known as bottoms in the forex market. The first bottom indicates a bullish reversal, followed by another dip in the price that confirms the trend reversal, reversing the market into a bullish trend. Traders generally opt for a long position during a Double Bottoms pattern to benefit from the increasing currency pair prices thereafter.
Double top trading example
Let us consider that you are trading USD/EUR with a current exchange rate of 2. The market is currently in an uptrend, and the currency pair makes its first high at 4.5 and trades near it for some time. The price corrects itself and starts trading around 2.7, still in an uptrend. The second high is made shortly as the currency exchange rate reaches the price level of 3.5, which is not as huge as the first top but still significantly towards the upward direction. This confirms that the market is overbought right now and can reverse anytime. Hence, you decide to place a short order at a price of 3.5 and wait to profit from the falling markets. Soon after, the price starts decreasing, and USD/EUR reaches an exchange rate of 1, enabling a successful trade order placed by you.
Double bottom trading example
Let us consider a double bottom in trading example by assuming that you are now trading AUD/USD, which is currently in a downtrend, trading at 1.5. The first bottom made by the currency pair is at a level of 0.2, after which AUD/USD keeps trending near the same price. A while later, the currency pair price corrects itself and starts trading near 1.1 before it makes another bottom at 0.80. The second bottom is not as grave as the first bottom but is significantly lower than the original exchange rate, signalling traders a bullish market reversal at any point due to the oversold market condition. Hence, at this point, you place a long order and buy AUD/USD at 0.80 to profit from the rising markets. Soon after, the prices start to increase and reach a level of 2.2, reaping enough profits from the long trade.
How to identify a double top?
- Check the current market trend to be in an uptrend.
- Identify the two peaks in the currency pair’s price chart which are near the same height, with the first peak being higher than the second.
- Both peaks must occur one after the other without much time in between.
- Identify the peaks being near the resistance level so the bearish reversal can be confirmed.
- Once the double top pattern is confirmed to be near the resistance level, the pattern is confirmed, and traders can place short or sell orders.
How to identify double bottom?
- Check the current market trend to be in a downtrend.
- Identify the two bottoms in the currency pair’s price chart which are near the same level, with the first bottom being lower than the second.
- Ensure that both peaks occur consecutively, without much time in between them.
- Identify the bottoms being near the support level so the bullish reversal can be confirmed.
- Once the double bottom pattern is confirmed to be near the support level, the pattern is confirmed, and traders can place long or buy orders.
How to trade the Double Tops and Bottoms chart patterns?
1. Double Tops Chart Pattern
A trader can trade the Double Tops chart pattern by opening a short position and selling currency pairs before prices start to fall continuously. Since the Double Tops indicate a bearish trend reversal, the traders are able to make an exit decision well in time as soon as the second top occurs in the market.
Let’s take an example with this graph that suggests there is an overall bullish trend in the forex market before the currency pair prices reach an extreme top. Let us consider this extreme top position as 1.5, assuming that you are trading USD/EUR. The increasing prices of the USD/EUR currency pair will stop at 1.5 and reverse with a downward momentum, reaching a price point of 1, indicating a trend reversal. However, this trend reversal will only be confirmed after the prices increase for one last time, for a brief moment, to 1.4 and again fall, below the price point of 1 this time. The USD/EUR prices will continue falling from here on, signalling a bearish trend reversal in the market. As a trader, you can open a short position at the second peak price point to lock in as many profits as possible and avoid any potential losses. Exiting the market at the second peak helps traders trade successfully with the Double Tops pattern.
2. Double Bottoms Chart Pattern
A trader can trade the Double Bottoms chart pattern by opening a long position in the market and buying currency pairs before the prices start to increase continuously. Since the Double Bottoms indicate a bullish trend reversal, the traders are able to make an entry decision well in time as soon as the second bottom occurs in the market. Let us understand this with an example.
The graph suggests that the USD/EUR prices slowly fall before reaching an extreme dip, also known as the first bottom of 1. The currency pair stops falling at the first bottom and rises for a brief moment to 1.2, where it decides to retrace back to the downward direction, confirming a bullish trend reversal after this point. Reaching back to a price point of 1, USD/EUR prices start rising consistently after the second bottom. A trader can benefit from the Double Bottoms chart pattern by opening a long position right at the second dip to ensure that they gain maximum profits as the price starts increasing. Stop-loss orders can also be used in order to protect oneself from falling prices in case the market decides to fall even after the second dip. Four steps to start trading the Double Tops and Bottoms pattern:
- Decide what you want to trade: You can trade currency pairs or CFDs with the Double Tops and Bottoms pattern by choosing whether you wish to go long or short in a particular position.
- Trade with a demo account first: Practice trading the forex market through a demo account and create a live one when you are ready to trade with the real prices finally.
- Identify the pattern: Analyse different forex chart patterns in different time frames and market situations to identify Double Tops and Bottoms.
- Understand what affects market reversals: Since the primary objective of the Double Tops and bottoms pattern is to signal market trend reversals, it is important that you read and understand the factors that can lead to a market trend reversal. Overbought/oversold situations, economic uptrends/downtrends, financial news, and more can affect the forex market trends.
Forex trading strategies for double tops and bottoms
Here is how you can trade the double top chart and bottom trading pattern –
1. Price analysis
When the currency pair chart pattern makes two bottoms consecutively, the price movement between these two levels provides the ideal price level to long the trade. When the chart pattern shows a big red candlestick as it hits the first bottom and the red candlesticks become smaller as the second bottom is hit. It provides traders with a reversal signal in the upward direction. Traders can place long or buy orders at the second bottom to place a profitable trade. But when the currency pair price chart pattern makes two tops consecutively, a huge green candlestick is formed at the first top move, followed by smaller green candlesticks at the second top move. This confirms a bearish reversal signal and provides signal to short the trade at the second top.
2. Price Divergence with RSI
Relative Strength Index provides price divergence as soon as the second top or bottom is weaker than the first top or bottom. When the currency pair price reaches the support level during a downtrend but fails to cross the support level, the double bottoms lead toward a bullish reversal and provide signals to buy or long the trade. In contrast, when there is an uptrend in the market, and the currency pair price reaches the resistance level but is not able to break above it, the double tops confirm a bearish trend reversal and provide a signal to sell or short the trade.
3. Bollinger Bands
Bollinger bands are plotted above and below the currency pair price. When the currency pair moves near the upper band, it signals an uptrend. When prices move near the lower band, it signals a downtrend. However, as soon as the currency pair price breaks above the upper band, it indicates an overbought market situation, signalling a reversal. Similarly, when prices break below the lower band, they indicate an oversold market and a downtrend reversal. During a double bottom chart or ‘W’ pattern trading, the oversold market confirms a bullish reversal and provides traders with ideal levels to long or buy a trade. During a double top or ‘M’ pattern trading, the overbought market confirms a bearish reversal and provides traders with ideal levels to short or sell trade.
Limitations of Double Tops and Bottoms
If the double tops and bottoms pattern is not supported by a resistance and support level, they can provide false signals. A double top chart pattern is a bearish reversal signal, but when a double top is not confirmed with a support level, it creates false breakout signals. Similarly, a double bottom candle pattern or ‘w’ pattern is an extremely bullish reversal signal, but when a double bottom reversal is not confirmed with a resistance level, it creates false uptrend signals.
Trade the Double Tops and Bottoms for confirmed trend reversals
The Double Tops and Bottoms can help you identify when the market reversals effectively and make smart trading decisions. The two continued highs or lows in a currency pair’s price enable traders to make market entry and exit positions. Blueberry, a global forex trading platform, can help you pinpoint significant market trends through our reliable and transparent trading experience. Sign up for a live trading account or try a demo account.
Disclaimer:
- All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. Traders should carefully consider their objectives, financial situation, needs, and level of experience before entering into any margined transactions.