Double top and double bottom and charts in trading

Carolyn Huntington

By the beginning of the last phase, as it is considered in the framework of technical analysis, inexperienced Forex market players are connected. They follow the crowd entering a growing market, but when the movement is already over, a hype arises in the market, on which experienced traders make money because they are focused on timing and leave the market with a profit, while inexperienced traders are left with a loss.

Resistance line

The concept of a trend in technical analysis implies the ability to see and draw lines — support and resistance levels, which form a conditional channel within which the value moves. An uptrend is plotted as a support line for successively increasing minimums — minimum price values (extremes). The resistance line is plotted at the price highs.

The resistance line on a downtrend is built according to successively decreasing highs, maximum values of a price. The support line is drawn at the lows. A flat, sideways movement, is plotted by horizontal or nearly horizontal support and resistance levels along the highs and lows.

Within the framework of technical analysis, trading strategies in the Forex market are built on the basis of only trend movements. Formally, the strategy is very simple. You need to notice the beginning, determine the optimal entry point, open a deal, determine the optimal exit point, close the deal, fix the profit, and leave the market. A more complex, also classic, strategy focusing on an ascending line involves opening buy positions on a rebound in price from the support line and closing near the resistance line.

On a downtrend, a sell trade is opened on a bounce off the resistance line and closed near the support line. Despite the fact that these strategies do not look complicated, for many reasons they are used in their pure form, without additional tools. The difficulty lies in the fact that you need to have really good skills in technical market analysis. At the same time, without additional tools, the trader must constantly be concentrated on the trading process.

It is difficult to determine truly optimal entry points for a position, and even more difficult are the exit points. Trading implies a placement of loss limiters (stop loss) — the trader determines the price at which the deal will be automatically closed, so without skills, without additional financial instruments, it is extremely difficult to decide at what level to set the limiter. 

From a psychological point of view, this is also a difficult method, since you need to be careful, be able not to succumb to emotions in the event of losses, which are almost inevitable, and continue to calmly analyze the situation in the market. The technical analysis manuals, which there are a lot of, say that there should be volume indicators on the charts. 

But these parameters are important for the stock, index, and futures markets. As a rule, volumes are not shown on Forex trading platforms on currency pairs, since this is a non-banking market and the volume of the Forex market as a whole is not monitored by anyone.

Charts and double top and double bottom

A graph is the key concept of technical analysis. In the Forex market, it can be seen on any trading platform. Any chart is based on the vertical axis, on which the price values are plotted and the horizontal axis is the time values. The time axis, which is also called the interval, the trading period and the timeframe can be for a period of 1 minute and to a year and further, if necessary. Ticks can also be indicated on the time axis. This is a single quote, a change in the form of two new buy and sell prices. The Forex price chart is formed for a specific period of time, mainly based on four values:

  • open — opening prices, the cost that was formed at the time of the start of trading; accordingly, it is formed as an average of the buy and sell prices and represents the first quote for a traded asset;
  • сlose — the closing price of the trading period, the value of the asset, which has developed by the end of the trading period, is also formed as the average between the purchase price and the sale price and is the last quote of the period;
  • the maximum value of the trading period (high) — looks like the highest price peak on the chart, it is clear that this is the highest value of an asset in a particular trading period;
  • the minimum price of the trading period (low) — the lowest value of the traded asset in a specific trading period.

A tick volume can also be preset on the chart. This is the number of ticks for a certain period of time. There are quite a few charts for Forex technical analysis in real time, but the classic ones are a line chart, a bar chart, a Japanese candlestick chart, and a tick chart.

A line chart is plotted at a price for a certain period of double top and double bottom. Most often at the closing price, but this does not exclude the use of open prices or extremes. It is used by traders who can trade well with patterns that are very visible on the chart.

The combination is also formed by two candles. After a strong bullish candle with a long body, a candle is formed that opens above the high of the previous candle. The closing price is approaching the low of the previous one, and the body of the candlestick is bearish. The bearish candlestick covers most of the bullish candlestick.

It is important that the second, bearish one opens above the high of the previous bullish candlestick. From the point of view of the market, this situation suggests that at first the bulls were in euphoria and the next candlestick opened with a gap, which indicates the intention of the bulls to continue to move the quotes up, but they did not have enough strength for this. The bearish candlestick confirms the strength of sellers and predicts a change in the trend.

Shape definition rules

In order for a newcomer to Forex to understand exactly what a double top pattern is in front of them, they need to pay attention to the following details:

  • It is necessary that there is a steady downtrend on the chart.
  • The first bounce off the support line indicates a local minimum, that is, the lowest point of the trend.
  • The price increase during a rebound is equal to no more than 20% of the position of the first bottom.
  • After that, the chart turns down again and goes to the support line.
  • The formation of the second low may take several weeks, but the chart will reach it and rebound again.
  • At the moment of the formation of the second minimum, you should pay attention to the trading volumes, they should grow.
  • After the chart goes up, wait for the crossing of the resistance line.

A curve crossing the resistance band upwards automatically turns this level into a support barrier.

Figure “Rhombus”

The Rhombus pattern, if it is pronounced, is considered a strong signal of an upcoming trend reversal in the Forex market. In the process of forming a rhombus, first, the trend fluctuations create an expanding triangle on the chart, and then, a symmetrical triangle appears. When a trader suspects that a diamond is forming, it is best not to trade. 

You need to be ready to trade when the formation of a symmetrical triangle is completed. When the price breaks through one of the faces of the symmetrical triangle, the trader can open a buy or sell trade. For example, if a double top chart pattern is formed at the top of an uptrend, then it is complete and you can open a sell deal. A rhombus is more clearly defined on a line chart, but it is more difficult to spot it on a candlestick chart.

Rectangle shape

The rectangle is considered one of the simpler patterns in the market, although that does not mean that the pattern is easy to analyze on a chart. A pattern is a range in which the price moves after a clear trend has formed. The rectangle indicates that the trend will move in the same direction and further. 

Trading is carried out within this figure, taking into account the fact that throughout the rectangle the volatility (price fluctuations) is approximately the same, that is, a flat, sideways movement develops. The rectangle cannot last long, and a breakout of one of its edges by the price indicates a change in the trend and a signal to open positions. But after breaking through, the price can correct to the same position.

Trade according to the pattern

So, a Double Bottom is a reversal pattern indicating that the trader needs to prepare to buy. If it already exists on the chart, you should know the rules for opening deals. The classic is to wait until the formation is complete and see firsthand how the price breaks the upper threshold.

After the next candle is completed, you can open buy orders. It is advisable to place stops above the support line and when buying, below the resistance level.

Summarizing what has been said

From what you have learned about the Double Bottom pattern, we can say that:

  • It indicates an increase in the price of assets in the near future;
  • You can trade after waiting for the breakdown of the resistance level;
  • The stops should be placed below the support level.

Even with the formation of a clear and understandable pattern, you should not use the figure as the only evidence of a trend change and trade without looking back. It is advisable to use additional indicators and technical analysis tools, for example, showing the volume of transactions or trend.

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