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Top and Bottom Reversals in Forex Trading
Written by: PaxForex analytics dept - Tuesday, 02 January 2018 0 comments
Many forex traders use chart patterns and formations to accurately predict the future direction of price. These chart formations are considered reliable, not only because they have historically performed as anticipated when they have occurred, but also because of the number of traders who are watching for these patterns. The double top and double bottom forex chart patterns represent another profitable way to trade reversals in the forex market. Just like the head and shoulders pattern, these chart patterns form after an extended move in the market that leads to a trend reversal.
The double top and double bottom form when price attempts, twice, to push higher or lower. The result is that an M or W pattern forms and this represents the end of a trend. Traders normally wait for this pattern to be confirmed when price pushes up or down beyond the first pullback, showing that it is not simply a short-term correction but a complete reversal of the trend. Double bottom and double top chart formations can be seen on all timeframes and they are made even more reliable if the second top or bottom fails to reach the price level of the previous top or bottom.
Trends can persist for longer than most people anticipate, which is why attempting to spot and trade based on where a trend will end—tops and bottoms—is often met with this skepticism. Being able to isolate potential tops and bottoms has its advantages though. Trading tops and bottoms don’t mean “catching a
falling knife.” On the contrary, top and bottom traders rely on evidence that suggests a top or bottom has already formed.
Forex traders wait until the double top fully forms before entering or exiting a trade. Just because the first leg of the M forms does not mean that the second leg will form. Traders look for the price to bounce up and then fall for a second time to confirm the double top pattern. Look for the price to break the neckline and head down before entering a trade. When the price falls and hits a resistance level, it may be the first leg of the W. At this point, the price can either fall back or break through the resistance level. Forex traders wait until the currency pair’s price breaks through the resistance level, which starts a new uptrend, before opening a trade.
Forex reversal patterns are on chart candlestick formations of one or more candles or bigger chart patterns which forecast price reversals. Every chart pattern has a mass sentiment component that can help a trader in gauging potential price swings. Double Top and Double Bottom patterns are two of the most prevalent and popular reversal chart patterns. When using a forex reversal strategy you would want to open a trade when you get a pattern confirmation and to hold for at least the minimum price projection based on the structure of the pattern.