Many Forex traders like to use technical analysis to help them make trading decisions. In this article on technical analysis, I’ll discuss the uses of and implications of the double top/ double bottom chart pattern.
What Is A Double Top/ Double Bottom?
Double tops/bottoms are typically used as trend reversal signals. This is because this candlestick formation is often found at the end of a trend on the trading charts.
A double top pattern consists of two clearly defined peaks (i.e. tops) at approximately the same price level. In an uptrend, prices rise to a resistance level, and then decline to a support level, thus forming the first peak. Soon after, prices start rallying again and attempt to break the previous resistance level (at the first peak) before failing and retreating once again, forming the second peak. On the charts, a double top formation looks like an “M”. When traders see this occurring, they will typically enter into short orders.
The reverse is true for a double bottom candle pattern, but forming a “W” shape instead, as well as traders subsequently entering into long orders.
What If Prices Break Past The First Resistance Level?
After the first peak is formed and prices manage to strongly break through the resistance level on the second rally attempt, then the double top formation has failed. In this instance it is NOT advisable to enter into a short position.
The reverse is true for double bottoms.
What Is The Underlying Reasoning For Double Tops?
The first peak shows that prices are unable to break through a particular resistance level. However, there will usually still be buyers in the market who will attempt to push prices back up again. Once the market forms a second peak, it shows more evidence that the buyers are not strong enough to push prices further up, wearing them out and allowing the sellers to continue pushing prices further down.
The reverse is true for double bottoms.
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