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Reversal Chart Patterns Double Tops and Double Bottoms Chart Patterns

Reversal chart patterns are formed after the market has had an extended move up or down and the price reaches a strong resistance level or support level respectively.


When price reaches such a point it starts to form a chart pattern - reversal chart pattern. Since these formations are frequently formed it is easy to spot them once you learn how and start using them.


There are four types of reversal chart patterns:

  • Double Tops
  • Double Bottoms
  • Head and shoulders
  • Reverse Head and shoulders

 

This tutorial will only cover double tops and double bottoms chart patterns, the other 2 will be covered in the next tutorial: head and shoulders and reverse head and shoulders chart pattern.

 

 

Double Tops - Reversal Chart Pattern

This double tops chart pattern is a reversal chart pattern that forms after an extended upward market trend. As its name implies, this formation is made up of two consecutive peaks that are roughly equal, with a moderate trough in between.


This double tops formation is considered complete once price makes the second peak and then penetrates the lowest point between the highs, called the neckline. The technical sell signal from this reversal chart pattern formation occurs when the market breaks below the neckline.


In Gold trading, this formation is used as an early warning signal that a bullish Gold price trend is about to reverse. However, it is only confirmed once the neckline is broken and the market moves below the neckline. Neckline is just another name for the last support level formed on the Gold price chart.

 

Summary:
Forms after an extended move upwards


This formation indicates that there will be a reversal in the market


We sell when price breaks below the neckline; see below for explanation.

Double Tops Reversal Chart Pattern

 

 

The double tops reversal chart pattern look like an M-Shape, the best reversal signal is where the second top is lower than the first one as shown below, this means that the reversal can be confirmed by drawing a downward trend line as shown below. If a trader opens a sell trade the stop loss will be placed just above this downward trend line.

M-Shaped Double Tops Reversal Chart Pattern - Downward Trend Line

 

Double Bottoms - Reversal Chart Pattern

Double bottoms is a reversal chart pattern that forms after an extended downward trend. It is made up of two consecutive troughs that are roughly equal, with a moderate peak in between.


This double bottoms reversal chart pattern is considered complete once price makes the second low and then penetrates the highest point between the lows, called the neckline. The buy indication from this bottoming out signal occurs when the market breaks the neckline to the upside.


In Gold trading, this formation is an early warning signal that the bearish Gold price trend is about to reverse. It is only considered complete/confirmed once the neckline is broken to the upside. In this formation the neckline is the resistance level for the price. Once this resistance is broken the market will move up.

 

Summary:
Forms after an extended move downwards


This formation indicates that there will be a reversal in the market


We buy when price breaks above the neckline; see below for explanation.

Double Bottoms Reversal Chart Pattern

 

The double bottoms chart pattern looks like a W-Shape, the best reversal signal is where the second bottom is higher than the first one as shown below, this means that the reversal can be confirmed by drawing an upward trend line as shown below. If a trader opens a buy trade the stop loss will be placed just below this upward trend line.

W-Shaped Double Bottoms Reversal Chart Pattern - Upward Trend Line


 

Technical Analysis