Hello and welcome to another edition of the bulls vs the bears. A while back we did a two part series on How To Trade Chart Patterns Like A Sniffer Dog Parts I and II This time we are going to look individually at these trading patterns. We will start with a popular pattern called the double top and bottom pattern.
We are going to learn how to make the most out of the double top and bottom pattern, In other words we are going to learn how to trade the double top and bottom.
What is a Double Top?
A double top is a reversal pattern that forms after a protracted bullish trend.. The tops, also known as peaks take shape when price hits an unbreakable level-or a level that can be broken. after hitting this level, price ricochets slight but turns around to test the resolve of this barrier once again. If price ricochets off this level again you have a double top.
Let’s see an illustration of this price action.
Ladies and gentlemen here is what a double top looks like. If you look up top you see two peaks forming courtesy of a strong surge by the bulls. See how the second top was held at bay by the high of the first stop. This should tell you right away that a reversal is about to take effect.Why? well, the bulls’ surge upwards is running out of gas.
So with that in mind you place your stop loss just below the neckline. This is because we expect the bulls to do a reversal of their upward surge. Now let’s see whether the reversal does takes place.
See There you have it! The reversal does take place. As we stated earlier, price breaches the neckline, triggering a bearish slalom down the slopes. This is easy pickins as far as profits goes.
Also notice how similar in height the downward surge is to the double top formation. Use that information in setting your target profits.
Next up is:
Double Bottom Formation
Just like the Double Top formation, the double bottom formation is also a trend reversal. But here should be looking to long instead of short. This because these formations come about after a long period of dominance by the bears during their surge downwards.
In simple English these formations take shape after an extended downward trend. Now let’s see an illustration of the double top in the price action below.
Ladies and gentlemen here is how the double bottom pattern looks like. As you can see two valleys have formed because the bears have reached the end of the road. The bearish downtrend has fast run out of gas.
See how the second bottom failed to crack the first bottom. That means the bearish shift is almost over, and the bullish shift is about to begin. In other words get ready for a bullish reversal.
Now let’s see whether the bullish reversal does occur.
Voila! The bulls do take over the next shift! Price cracks the neckline , triggering a major surge up the hill. See how the price push is the same height as the double bottom formation? Just like the double top setup, you use the height information in setting your target profits.
That’s a wrap for “How To Make The Most Out of Double Top and Double Bottom Chart Patterns. ” Double top and double bottoms are reversal patterns that you can easily run to the bank with. The precise entry and exit points that these two patterns create make them user-friendly for forex traders.
All you have to do is identify these patterns and run up your cash register. It’s that simple. Next time we will look at Trading the Head and Shoulders Pattern.
Til next time take care
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