Reversal Setups

These patterns are formed after the market has had an extended move up or down & the price reaches a strong resistance or support respectively.

When trading price reaches such a point it starts to form a pattern. Since these formations are frequently formed it is easy to spot them once you learn how and begin using them. There are four types:

• Double Tops
• Double Bottom
• Head and shoulders
• Reverse Head & shoulders

This learn xauusd tutorial will only cover double tops and bottoms, for the other 2, read this other tutorial: head & shoulders and reverse head & shoulders

Double Tops

This is a reversal xauusd setup which forms after an extended upwards trend. As its name implies, this pattern setup is made up of two consecutive peaks which are roughly equal, with a slight trough in between.

This setup is regarded complete once price makes the second peak & then penetrates the lowest point between the highs, called the neck-line. The sell signal from the formation forms when the market breaks-out below neckline.

In XAUUSD, this formation is used as an early warning signal that a bullish trend is about to reverse. However, it's only confirmed once the neck-line is broken and the market moves below the neck-line. Neck line is just another term for the last support level formed on the chart.

Summary:

• Forms after an extended move upward
• This formation indicates that there will be a reversal in market
• We sell when the price breaks-out below neck-line point: see below for explanation.

The double top look like an M Shape, the best reversal signal is where the second top is lower than the first one as illustrated below, this means that the reversal signal can be confirmed by drawing a downwards trend-line as illustrated below. If a trader opens a sell signal the stop loss will be placed just above this down ward trend-line.

M Shaped

Double Bottoms

This is a reversal xauusd setup which forms after an extended downwards trend. It's made up of two consecutive troughs which are roughly equal, with a slight peak in between.

This setup is regarded complete once price makes second low & then penetrates the highest point between lows, called the neck-line. The buy indication from the bottoming out signal occurs when the market breaks-out the neckline to the upside.

In XAUUSD, this formation is an early warning signal that the bearish trend is about to reverse. It's only considered complete/confirmed once the neckline is broken. In this formation the neck-line is the resistance level for the price. Once this resistance level is breached the market will move up.

Summary:

• Forms after an extended move downwards
• This formation indicates that there will be a reversal in market
• We buy when the price breaks-out above neck-line point: see below for the explanation.

The double bottoms pattern look like a W Shape, the best reversal trading signal is where the second bottom is higher than the first one as displayed below, this means that the reversal signal can be confirmed by drawing an upwards trend-line as illustrated below. If a trader opens a buy signal the stop loss will be placed just below this upwards trend line.

W Shaped