A forex trader has to be a master of many things and looking at the forex chart patterns and acting on the same is one of the biggest hurdles to conquer. These charts provide historical price information for identifying the current demand and supply forces and how prices could get affected as result of these forces. In this context, double tops and double bottoms are two of the most common reversal patters that are widely followed and observed by the participants of the forex market.
Let us first read about double top and then follow it with double bottom to gain a clear and complete understanding.
A double top is a price reversal formed after an extended upward movement in the forex market. In other words, the "top" is the peak that can be seen when the prices hit a level that is not expected to be broken. Once the prices reach this level, they tend to bounce off a little and then make a return to the top again. In case the prices bounce off to the same level again, then there is a double top. The double bottom is the opposite and is all about prices reaching to a low and then improve slightly only to fall again and reach the same level. It is important noting here that both double tops and double bottoms are reversal signals and a forex trader has to wait for the neckline to be broken down in case they are at the end of an uptrend.
It is worth noting here that traders should remember that the process for a valid trading signal is all based upon the price action touching a support for a bottom or resistance from the top. This is followed by trading away from this level for a specific period of time and then making a return and testing the same level and abiding but it. In cases when the double top formation has failed, as depicted by chart reversal patterns, traders are advised not to enter into a "short" position.
In short, a forex trader should note the fact that playing the foreign exchange market is like a mathematical game in which the right numbers and calculations are to be plugged and made so that profits can be maximized and losses can be reduced. However, the problem with forex trading is that while math has only one answer to a problem, which can be accessed by one and all, the results are expressed in numbers in forex and not every mind has the potential to identify and act on the right numbers at the right time and place. However, things can be made easy by a forex trader by emphasizing upon his strengths and working upon the weaknesses.
The emotions of greed and fear should find no place in the books of a trader and should be best avoided even if a possible gain can be seen coming the way on breaking trading rules. This is simply because a trader can benefit, for a while, by breaking rules but things can turn disastrous and the chances of failure are extremely high, to say the least.