In the foreign exchange market, analyzing charts to spot double bottoms and double tops is not rare. The patterns actually show up often that the credibility of the professionals who say that price action is random becomes questionable; critics are asking, do these people really know what they are talking about? As it goes, market activity may not be as spontaneous, after all; the fact that the frequency of prices that stop at certain points to form double bottoms and double tops is worth checking out. What Are Double Bottoms and Double Tops?
Double bottoms are chart patterns that occur during a downward trend. Initially, they form by finding a support point at a low level, then, they will continue to rise to a high level; the process repeats itself by peaking at similar (or close) low and high levels. They serve as an indication of an incoming reversal from a downward trend to an upward trend. Since they resemble the letter W, they are easily identifiable.
Double tops, on the other hand, are chart patterns that occur during an upward trend. They form by setting a support point at a high level, then, they begin to decline to a low level; the formation is accomplished twice. They represent an incoming reversal from an upward trend to a downward trend.
It follows that double bottoms and double tops, like other chart patterns, express the sentiments of traders; with their appearance on a chart, they boost a trader’s confidence. They serve as representations of the fact that market participants are usually aiming for temporary lows and highs. They are profitable since they are strong signals of a trend reversal, as well as the right time to enter or exit the market.
Should You React or Should You Anticipate?
A concern with double bottoms and double tops is that setting them up seems to make results predictable; however, if a trader monitors them throughout a trade, it isn’t surprising if he ends up disappointed. His options come down to whether he should react immediately or he should observe price action some more. Although it has been said time and again that once a pattern is established, a decision needs to be made, it’s not always the case.
After a trader identifies double bottoms and double tops on a chart, it’s his prerogative whether he should make a move or wait. Either approaches can be profitable, granted that interpreting chart patterns is done correctly, and as long as the focus is kept on the current market activity.
Source: MTrading