Picking tops and bottoms in currency trading is a mixture of art and science. The Foreign Currency Exchange, or Forex, market operates twenty-four hours seven days a week. Unlike stock and commodity trading, there is no definite time when trading stops and starts. Forex traders use technical indicators to confirmation that a currency pair’s price has hit a top or bottom. Using double top and double bottom chart patterns can help Forex traders determine if a currency pair’s price trend is going to change.
Definition of a Double Top
Double tops form when a currency pair’s strong price uptrend starts to weaken. It is a reversal pattern that can indicate the currency pair is about to start trading in the opposite direction. A double top looks like a capital M. The currency pair price reaches a high and then falls back, forming the first top of the M. The price rises to test the previous high price for a second time. If the price falls back again, the second top of the M is formed. The neckline is the support level where the prices fell back to. The trend reversal is confirmed when the price breaks below the neckline.
Trading a Double Top
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 downward before entering a trade.
Definition of a Double Bottom
Double bottoms appear when a currency pair is in a weakening downtrend. This reversal pattern indicates that price may be ready to break out in the opposite direction. A double bottom looks like a capital W. The currency pair price drops to a low and then goes up, forming the first leg of the W. The price falls to test the previous support level for a second time. If the price rises again, the second leg of the W is formed. The neckline is the resistance level to where the price previously rose, and the trend reversal is confirmed when the price breaks above the neckline.
Trading a Double Bottom
When price falls and hits a resistance level, it may be the first leg of the W. At this point, 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. Waiting for the double bottom to prove itself helps avoid being caught on the wrong side of a trade should price resume the downtrend.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.