Tops and Bottoms

Tops and bottoms are commonly used to signal trend reversals. The name is derived because the candlesticks form a pattern similar to the letter "W" (double bottom) or "M" (double top). These patterns develop in period that last over 1 day.

Double Top

This pattern appears when a currency pair on a rising trend faces resistance. Upon resistance the price falls to a support level, which becomes the neckline. The price then returns back to the resistance level. After failing to break the resistance level a second time the pair falls back down. At the neckline price breaks down into a new downward trend.



Double Bottoms

The same but opposite scenario occurs in the case of a double bottom. A downtrend reverses after testing a certain support level twice. Failing to breakthrough, price reverses into a new uptrend. Sometimes, the pair will retest the neckline, which should switch its role from support to resistance.



Triple Tops and Bottoms

In the typical triple top formation each one of the heads is about the same size. A line of resistance can be drawn connecting the three tops. A neckline should be drawn connecting the support levels. After the third head, price falls below the neckline. The market may rebound for a short attempt at breaking back past the neckline only to be followed by the start of a new downward trend. The same is applicable for the Triple bottom.



Rounded Tops and Bottoms

Another variation of the shape a top and bottom can take is one in which the reversal is "rounded". The rounded top formation forms when the market gradually yet steadily shifts from a bullish to bearish outlook while in the case of a rounded bottom, from bearish to bullish. The prices take on a bowl shaped pattern as the market slowly and casually changes from an upward to a downward trend.

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