Forex Trend Reversal: The Double Top and the Double Bottom Patterns

The double top and the double bottom formations represent another well-known pair of trend reversal patterns that are commonly found on forex charts.

Double Top Trend Reversal Pattern

The double top reversal pattern is characterized as being highly reliable and can be found at the peaks of an upward trend. It includes two tops that have approximately equal heights and depicts the following currency price movement:

1. The currency price rises to a peak, which when reached faces resistance and then a drop to a level of support follows.
2. Another peak at the same level as the previous one follows, and then another drop.

A resistance line connects the two tops and a line parallel to it (a support line) is drawn. The double top chart pattern is considered confirmed and complete when the price drops below the support level, thus marking the reversal of the upward trend.

In order for this formation to successfully develop, the break through the support line should occur under the condition of a heavy market volume. Additionally, forex traders should not be alarmed if in the newly established trend a return to the new resistance level (former support level) occurs. This is known as a "throwback" move. It is considered to be a test of the reversal formation and its success helps to strengthen the pattern and the new trend.

Several weeks to several months are needed in order for the double top to develop. What is more, the intraday chart patterns are considered of a less reliable nature.

Double Bottom Trend Reversal Pattern

A mirror image of the double top formation is the double bottom chart pattern. This means that the same characteristics as well as potential drawbacks and signals can be referred to this type of chart formation.

As in the double top, large market volume is required. Additionally, a relationship between the length of time needed for the double top or double bottom to develop and the significance of the reversal pattern exists.

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