How do you trade double tops and bottoms in the Forex market?
Some of the widely used indicators in the Forex market are trend lines, support and resistance, Fibonacci re-tracement, and Bollinger bands, but apart from that there are many other strategies that are used by the traders who like playing it safe. Moreover, Cup-and-handle pattern, head-and-shoulder pattern, Double Tops and Double Bottom pattern are the strategies used mainly to forecast and ‘confirm’ the next movement in the market.
The idea that price movement in the market is random and could go anywhere, is not true because the technical analyses are solely based on the past behavior or patterns of the price. Prices tend to respect their previous ‘levels’ they made in terms of highs and lows, so determining double tops and double bottoms isn’t that difficult as it may sound. Whether you are trading on hourly charts or daily chart, you could easily sketch a horizontal line on the tops or lows that the pair has made in the past.
Double Top Example
The following chart is an example of a double top pattern that was formed by Eur/Usd near 1.3275, from where it bounced back and made a bearish move of more than 100 points till 1.3150.
Wise traders do not rely and trade based on any single indication; in fact they ‘confirm’ their analysis by following other indicators as well. Double tops or double bottoms strategy works very well most of the times, and is also used as a complementary indicator for ‘head-and-shoulders’ pattern.
Similarly, this chart shows the double bottoms pattern formed by Eur/Usd at the psychological level of 1.3000, after which the pair rallied more than 150 points and tested the level of 1.3190.
Apart from giving a clear indication of the next move in the market, this pattern allows the traders to set their stop loss tightly. For instance, if they are trading this double bottom chart, then they could set their stop loss just below 1.3000 level at somewhere around 1.2985 and could go long on the pair with heavy lots. Traders who prefer playing safe and avoid risk often open multiple lots separately once the price starts moving in their favorable direction, rather than opening a huge lot initially at once.
The phenomenon of strong support or resistance allows a trader to ‘predict’ the level at which the price would bounce back either from support or resistance, hence making it easier for him to set his take profit limit at that level too if they are already in the market.
Moreover, pending orders are also set based on double tops or double bottoms pattern, where anticipatory traders set their entry limit by assuming that the price would bounce back from a particular support or resistance. The following chart shows how a trader could set its ‘buy’ entry positions at the support level area of 1.5500.