In Forex investment, double top and double bottom chart patterns are one of the most popular and widely used patterns. Understanding and using this double top and double bottom model, you will be more successful in investing. So what is this model, how to trade, let’s find out with Forex Trading in the article below!
A brief introduction to double top and double bottom chart patterns
First, before going into more in-depth content, you need to understand what double top and double bottom chart patterns are. Characteristics as well as the formation process for trading.
What are double top and double bottom chart patterns? Characteristics of the model
Concept
The double-top pattern is known as a price reversal pattern. The pattern will usually appear at the end of every uptrend. Through this model, investors recognize the market’s reversal signal from increasing to decreasing.
In contrast to the double top model, the double bottom model predicts that the market trend is from decreasing to increasing. This pattern often appears when the market is at the end of a downtrend.
In terms of shape, the double-top pattern will consist of 2 peaks of almost equal height. Along with that is a Neckline passing through the bottom formed by the two peaks of the model. Thus, more visually, the model will be shaped like the letter M.
Meanwhile, the double bottom pattern has a shape similar to the W shape. The pattern has a central peak and the Neckline passes through this peak.
Characteristic
The double-top pattern includes the following characteristics:
- The pattern is a clear uptrend
- M-shaped models have similar heights, with a price difference of no more than 5%. The central bottom is formed between the two peaks. The neckline, also known as the neckline, passes through the center bottom. The Neckline will now act as a support line.
- To form a model, the completion time is usually from 3 to 4 weeks. The pattern is most accurately identified when the price breaks out of the Neckline.
- The telltale signal is when the price breaks out of the Neckline line and drops sharply. Or when the price retests the Neckline and then drops sharply, it is also a signal to recognize the model.
Meanwhile, the double-bottom model includes the following characteristics:
- The double bottom pattern is a clear downtrend. In case the trend only increases or appears transiently, the model forecast will not be accurate.
- The model is in the shape of the letter W.
See more: Analyze & forecast trend effective candlestick pattern
The process and meaning of forming double top and double bottom chart patterns
The process of forming a double-top pattern is because buyers initially try to push the market price up in line with the main trend. At this time, when realizing that the market is in an uptrend or Bullish state, sellers quickly participate in the market. This causes the price to begin to reverse and tend to decrease, thereby creating the first peak of the pattern.
When the price drops, the buyer begins to buy more and pushes the price up. However, this price could not overcome the resistance level. From there, the second peak forms.
The formation of two tops shows that the buying side is weakening and the selling side is pulling the price down. Therefore, when the price breaks out of the Neckline strongly, investors can recognize it and enter a “Sell” order to take profits.
In the 2-bottom model, the first bottom appears when the market is in a medium or long-term downtrend. This is the lowest bottom in the current market trend. The price will not decrease further at this time. The market shows signs of recovery.
When the market increases again, buying demand increases. The price also followed suit and increased to the resistance level. Price reversed and decreased. The reason for the price drop at this time is that many people take profits from buying from the first bottom. Investors realize that although prices have increased, they are still not strong enough to create a breakthrough. At that time, the market went down and created the second bottom.
How to trade effectively with double top and double bottom chart patterns
Although you recognize the model, you are still confused about how to trade with this model. Below are some effective trading methods imparted by experienced investors.
Method 1: Trade with the double top model when the price breaks out of the Neckline
As soon as you see the pattern forming and the price breaking out of the Neckline, you enter a “Sell” order.
The entry point is placed at the closing price of the candle that broke the Neckline.
You place your stop loss a few pips away from the 2nd peak of the 2 top patterns or below the 2nd bottom for the 2 bottom patterns. The take profit point is placed at the exact height of the model from the entry point. Or you apply it at a ratio of 1:2 or 1:3.
Method 2: Trade when the price returns to retest the Neckline
If you feel the first trading method is a bit risky, you can choose the second option. However, with this trading method, you may miss a good opportunity if the price cannot retest and continues to decrease. strong down.
With this trading method, you enter an order at the point where the price returns to retest the neckline. As for the stop loss and take profit points, you do the same as method 1.
Method 3: Trade as soon as the second peak or bottom appears
The third way of trading will be different from the two methods above as it must use the trendline. The trendline is a straight line passing through the center bottom and the bottom of previous corrections.
For this trading method, you enter an order at the point where the price drops sharply from the second peak and begins to touch the trendline. You choose a stop loss point a few pips above the second peak for the double top pattern. Or a few pips below the bottom 2 for a 2-bottom pattern. The profit-taking point is similar to the two methods above.
Compared to method 1 and method 2, method 3 has a higher risk. However, you know, the greater the risk, the higher the profit. If the price goes according to prediction, the profit earned will be extremely large.
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Some notes when trading with the double-top model
How to trade with double top and double bottom models you already know. However, to be more effective in the investment process, please keep in mind a few additional notes below.
First, when trading with the model you should not continuously stuff orders. Especially for investors who have just entered the market, it is even more taboo. You should know what is enough. Thus, even if the prediction is wrong, the risk that may be encountered can be minimized.
Next, you should also have a plan to manage capital effectively. Once you have set a plan, you need to adhere to it absolutely. This will help you limit the situation of burning your account when the market has unexpected fluctuations.
In addition, do not ignore the trading volume between the two peaks for the double peak model. Or the trading volume between 2 bottoms for the 2 bottom models. For a 2-peak model, the 2nd peak is usually no more than 5% lower than the 1st peak. In case you notice that the volume between two peaks is almost equal or lower, do not rush to place an order. Instead, take the time to follow up further.
Finally, you should not only apply one model in trading but combine indicators as well as Japanese candlestick patterns or head and shoulders patterns to more accurately recognize market signals. As for what is a head and shoulders pattern, you can refer to other articles on the site. From there, your transactions will also have a higher probability of success.
summary
Above is all the necessary information related to double top and double bottom chart patterns. Hopefully, the above knowledge will help you be more confident when trading Forex. Besides, Forex Trading also provides a lot of other useful knowledge, don’t forget to follow and update.
FAQs:
In Forex, is the 2 top, 2 bottom pattern considered a continuation or reversal pattern?
This is a reversal pattern.
Should I place an order when the price breaks out of the Neckline or wait for the price to retest the Neckline?
This model is often very easy to break. In case you want to trade early, wait for the price to break out of the Neckline then place an order. On the contrary, if you are a safe investor, you can wait for the price to retest before placing an order.
Should we only rely on the 2 top and 2 bottom models to trade?
Of course not. Because no model is completely accurate. You should combine many other indicators and models for analysis before placing an order.
