A double top forms when the price reaches a level that cannot be broken. As soon as the price reaches that point it meets the resistance, it bounces back like a ping pong ball to the level of support, but then goes back to the unbreakable level once again. Now, at this stage you still don’t have a double top. To have double top formation the price has to bounce off that level for the second time and there you have it - two “hills” of price movement.
The line which connects to two tops is a resistance level. Another line is a support level and it is drawn based on the point from which the price goes back up for the second time. Double top pattern is considered over when the price drops under the support line.
Double top formation doesn’t form within seconds, or even minutes. In forex trading it may take weeks if not months for the formation to take place.
Double top pattern is actually the most common one in forex trading. It appears often enough to disagree with those who claim that the price movements are a random and unpredictable. The price frequently stops at the top points and therefore can hardly be considered random.
As you probably have already guessed, double top pattern has a twin – the upside down copy – and it is referred to in forex trading as double bottom.
A double bottom forms when the price drops, then rebounds, and drops for the second time to the equal or almost equal level as the first drop and finishes of by another rebound.
What should a forex trader do when these formation appear?
In case of the double top, it would be wise to place the trading orders below the neckline since according to the nature of the pattern there will be a turnaround of the uptrend.
In case of the double bottom, the general trading perception is to place trading orders above the neckline.
A double top is a reversal forex chart pattern which is considered to be reliable among many forex traders. The formation is created when there is an extended price move upwards. The main features of double top are the two peaks (or in other words “tops”) which are located almost equally at the same height.