Commonly known as the Double Top and Double Bottom charts, these are the most common chart patterns. They are tradable hints and opportunities which look simple to trade yet are not that easy either. These patterns are price action dependent. A price action is reflective of the market sentiment. In the context of FX, price action is regarded as the trading technique that helps traders to understand the market. This understanding eventually helps a trader make trading decisions based on the price movement, of the recent past as compared to the current times.
Why are charts used?
Before delving into what is a Double Top and a Double Bottom chart, it would be helpful to understand, why are charts used by the traders at all?. For traders who believe in technical analysis, charts are the tools for tracking the market on parameters like price, open interest and volume. These parameters are in the form of settings in the charts and can be customized and used by the traders as and when needed. These charts help traders spot opportunities to enter or exit the FX market along with making decisions about where to target the stop-loss order or the first profit level.
Forex expert, Kishore M makes a vital observation about technical traders here. He says, “Reading these charts is a skill that every technical trader must develop. An error in reading the charts will not only lead to missed opportunities but might also cost the trader a huge profit”.
In the context of the Forex market, charts help technical traders to look for potential currency pairs to invest in. Ideal for short-term trading, traders usually use charts with indicators, for a sharper analysis.
Interestingly these charts can be compliment to Algo trading systems like the legit Power Up Forex trading system.
What are Double Top and Double Bottom charts in FX?
Double Top and Double Bottom chart patterns show up during an uptrend and a downtrend in the market, respectively. These chart patterns are more like the variation of the support and resistance level theory. They are influenced by the demand and supply of the currencies, in the market, in case of Forex trading. With the currency market becoming a favorite amongst the new traders, information about charts and indicators are given in the Forex trading workshops that most of these traders attend.
Double Top pattern (Bearish pattern):
A Double Top pattern chart consists of two upward peaks on the left and the right with a trough in between. This pattern occurs during an uptrend. The chart is read as: the first peak is the first high or upward movement of the price. This peak also called the shoulder, which represents an upward price movement, gives way to a fall, as the currency pair loses its valuation. This is called the pullback which is depicted by the trough which forms in the chart. The next movement is a peak again, which does not reach as high as the price of the first peak. Since there are two peaks in this pattern, it is called the Double Tops pattern.
In this pattern, during the second fall through, the graph would break through the previous level of the fall and go lower. This will be an indication to sell. This fall also flushes out the stop loss orders. Once the stops are out, the market rallies again.
Interestingly, this pattern formation is always in between the trend lines.
With the uptrend, the first top’s peak hits the trend line which forms the resistance level for the price. The fall or the bottom of the trough is the neckline, which is the support level. In a Double Top pattern, the second top or peak is unable to break the resistance level. Instead, it takes the second fall, which breaks the neckline.
Points to be noted here are :
- The entry level will be just below the second peak
- The stop loss orders will be put :
1) Just above the second peak but below the resistance level; and
2) Just above the neckline
Double Bottom Pattern (Bullish):
A Double Bottom chart pattern is the absolute mirror image of the Double Top chart pattern. A reversal pattern by nature, Double Bottom chart develops in a down-trending market, which is basically a weak market, with lower highs and lower lows. The market hits the lowest low at one point and does not go beyond. The lowest low is the support level of the market.
A Double Bottom chart is read as: The existing downtrend continues and hits an all-time low as the market slides. It then bounces back and till a particular point where it hits the resistance level. Here too there would be two shoulders, a right and left and a trough in between.
In this chart, the first low represents a fall in the valuation of the currency pair, which then bounces back, rallies and falls again. The second fall, however, does not touch the support level. The graph rallies for a second time. This time the resistance level is surpassed with a breakout as the market rallies.
For aggressive traders, the entry point is just below the resistance level, before the breakthrough. The first profit target in this kind of chart is set above the resistance level. The Double Bottom chart pattern also develops within two parallel trend lines.
The first profit target, in this bullish chart, is set at the same height from the resistance level up as the distance in between the resistance level and the support level(down).
Points to be noted here are:
- The entry point is just above the neckline or the resistance level
- The stop-loss order is placed way below the resistance level.
For technical traders, who are looking at short-term trading, the Double Top and the Double Bottom charts are crucial tools, for taking profitable positions in the Forex market.