Reversal Patterns Double Top and Double Bottoms Patterns
Reversal chart patterns are formed after the market has had an extended move up or down and the price reaches a major resistance zone or support zone respectively.
When price reaches such a point it starts to form a pattern setup formation - reversal chart pattern. Since these formations are frequently formed it is easy to spot them once you learn how & begin using them.
There are 4 types of reversal patterns:
- Double Top
- Double Bottoms
- Head and shoulders
- Reverse Head & shoulders
This guide will only cover double tops and double bottom chart patterns, the other 2 will be covered in the next tutorial: head & shoulders & reverse head and shoulders pattern.
Double Tops - Reversal Setup
This double tops chart pattern is a reversal chart pattern that forms after an extended upward market trend. As its name implies, this setup is made up of 2 consecutive peaks that are roughly equal, with a moderate trough in between.
This double top setup is regarded complete once the price makes and forms second peak and then penetrates lowest point between the highs, called the neck line. The technical sell signal from this reversal chart pattern formation occurs when the market breaks below the neck-line.
In XAUUSD trading, this setup is used as an early warning signal that a bullish Gold price trend is about to turn and reverse. However, it is only confirmed once the neck-line is broken & the market goes below neckline. Neckline is just another name for the last support level formed on the Gold price chart.
Summary:Forms after an extended move upwards
This setup reflects that there'll be a reversal in the market
We sell when the price breaks-out below the neckline: see below for an explanation.
Double Tops Reversal Setup
The double top reversal chart pattern look like an M-Shape, the best reversal signal is where the second top is lower and lesser than the first one just as shown below, this means the reversal signal setup can be confirmed by drawing a downward trend line just as shown below. If a trader opens a sell trade the stop loss will be placed just above this downward trend-line.
M-Shaped Double Tops Reversal Pattern - Downwards Trend-Line
Double Bottoms - Reversal Pattern
Double bottoms is a reversal chart pattern that forms after an extended downward trend. It is made up of 2 consecutive troughs which are roughly equal, with a moderate peak in between.
This double bottoms reversal setup is regarded complete once price makes the second low and then penetrates highest point between the lows, called the neck line. The buy indication from this bottoming out signal occurs and happens when the market breaks the neck-line to the up-side.
In Gold trading, this setup is an early signal that the bearish Gold market trend is about to turn and reverse. It is only considered complete/confirmed once the neck line is broken to the upside. In this setup the neck-line is the resistance zone for the price. Once this resistance is breached and broken the market will move upward.
Summary:Forms after an extended move downwards
This pattern reflects that there'll be a reversal in the market
We buy when price breaks above the neck-line: see below for an explanation.
Double Bottoms Reversal Pattern
The double bottoms setup looks like a W-Shape, the best reversal signal is where the second bottom is higher than the first one just as shown below, this means the reversal signal setup can be confirmed by drawing an upwards trend-line like is shown below. If a gold trader opens a buy trade position the stop loss will be placed just below this upwards trend-line.
W-Shaped Double Bottoms Reversal Pattern - Upward Trend-Line
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