FOREX TRAINING

By Gilbert Pardla

Double TOP/
BOTTOM
E X P L A N AT I O N
 Double TOP/BOTTOM
Explanation

The market is on the trend around 60%-70% of the time. This means opening a

position at the beginning of a trend guides traders into the best results. To

discover for trend reversal points has generated multiple reversal patterns but the

most effective is the Double Top/Bottom. It is one of the most well-known and

frequently used chart pattern among traders. However, this clean and simple

pattern is very powerful and contains a lot of information that is needed to predict

price reversals.

The Double Top/Bottom chart pattern is formed at the end of a trend when the

price meets a support or resistance level, depending on the previous movement.

 Double TOP after the uptrend

As you see in the example above, the price is the second time on the resistance

area and if it gets a second rejection downwards from the mentioned resistance

line then the Double Top/Bottom chart pattern starts to form. If the rejection

occurs, then the most important aspect is the pattern neckline (image below).
 Second rejection from the resistance and it has a break below the neckline

The price got a second retracement downwards from the resistance line and the

reversal chart pattern Double Top is activated. The pattern is active when the price

has made a break below the neckline.

Let's continue with this Double Top example (image above), the break is

confirmed only then when the candle gets a close(!) below the neckline (EA

works on every timeframe). After that, we have a confirmed breakout from the

neckline and the reversal chart pattern is valid. The candle close is needed

because of the fake-outs, you have noticed those high wicks up and down, those

are the fake-outs. This EA goes into the trade, only, after the candle close, then it

removes those fake-outs from your trading field and most importantly, the chart

pattern is valid.

This is not just a Double Top/Bottom chart pattern, if we take a bit closer look then

it is more than that. There are some hidden price action criteria - to be punctual,

there are five hidden criteria before the EA can open an order - that a novice
trader does not see. Let’s continue to describe those on our well-known Double

Top example.

After the second rejection from the resistance line and after the candle close(!)

below the neckline it has made two important the mentioned price structure

changes which are needed to be a good reversal signal:

1. The price has broken below the upwards trendline (green line) which is an

indication that the strong uptrend may become over and the reversal signal comes

more favorable - more indications equals with a better success rate.

Price breaks below the up-trendline which is an indication that the trend may

reverse. Currently, there are two indications that the price may take a reversal:

- It has confirmed breakout from the Double Top chart pattern (close below the

neckline)
- It has broken below the trendline.

2. The second important aspect is the new lower low (LL). If the price starts to make

clean higher highs and higher lows then we know that the asset (currency, stock

etc.) is strong and healthy but if it makes new lower low, as on the image below,

then it would be a sign that buyers are not so interested to buy it from the higher

levels. So, we got another sign which indicates for the coming reversal and this is

the new lower low (red circle).

Price breaks through the neckline and it makes a new lower low (LL)

Now, we have three indications that the price may take a direction downwards:

- It has confirmed breakout from the Double Top chart pattern (close below the

neckline)

- It has broken below the trendline.

- It has made a lower low (LL).

As you noticed, the simple Double Top/Bottom chart pattern with just two support

or resistance bounces has some very important hidden price action criteria which

all indicate for the becoming price reversal and our Expert Advisor (EA) don’t open

any orders before all the required criteria are filled.

If we add some indicators into the EA which will confirm that reversal price action,

then we can make this reversal pattern even stronger.

Indicators, which makes Double Top/Bottom EA more

secure.
Relative Strength Index (RSI) Divergence

The Relative Strength Index (RSI) is one of the most popular indicators on the

market. The relative strength index is a momentum indicator that measures the

magnitude of the recent price changes to evaluate overbought or oversold

conditions in the price of an asset. The RSI is displayed as an oscillator (a line

graph that moves between two extremes) and can have a reading from 0 to 100.

Price breaks through the neckline and it makes a new lower low (LL)
The difference between the indicator and price is called divergence and it can have

an impressive impact on price movement. Divergence in an uptrend occurs when

the price makes a higher high but the indicator does not (on the image above) and

on the downtrend, divergence occurs when the price makes a lower low, but the

indicator does not. If the divergence is spotted, then there is a higher probability

of a price retracement and the reversal momentum will be much higher.

The divergence signal may appear just as the trend changes. Traders use the RSI

divergence as an early warning signal to enable them to prepare for a trend

change and the Double Top/Bottom chart pattern just confirms that trend reversal

which occurred after the RSI divergence on the top. This criterion is installed into

our Expert Advisor and it does not open any trades if there is not RSI Divergence

on the top or on the bottom. Now, we have four indications that the price may

take a reversal:

- It has confirmed breakout from the Double Top chart pattern (close below the

neckline)

- It has broken below the trendline.

- It has made a lower low (LL)

- RSI Divergence on the top

Moving Average

The moving average (MA) is a widely used indicator in technical analysis. It is a

trend-following indicator and it is based on past prices.

The two basic and commonly used moving averages are the simple moving
average (SMA), which is the simple average of ay over a defined number of time

periods, and the exponential moving average (EMA), which gives greater weight to

more recent prices, both types of moving averages are coded into the Double Top/

Bottom EA. The most common applications of moving averages are to identify

the trend direction and this is the reason why it is on our Expert Advisor. The

Double Top/Bottom EA follows the moving average trends, an example: if the price

is below the moving average (parameters you can choose your own) then it is

searching only sell setups and if the price is above the moving average then it

searches only buy setups.

Price breaks through the neckline and it makes a new lower low (LL)
 Moving Average (red line) is below the price and can’t open any sell trades.

Finally, if they are all lined up then we have five amazing price action criteria

matching each other and the Expert Advisor is ready to make a trade:

- Adequate funding - please do not think that you can earn thousands weekly if you

have initial capital of 500 Euros.

- It has broken below the trendline.

- It has made a lower low (LL).

- On the top, we have a reversal signal from RSI Divergence

- The price must be above the moving average to open buy order, the price has to

be below the moving average to open a sell order

Orders
The first entry point is based on the neckline breakthrough, obviously, all

prementioned five criteria must be filled, if one is missing then the EA can’t open

any orders. Let’s play through that Double Top example – if the price is above the

moving average, NO trade, if the price didn’t close below the neckline, NO trade

etc.

If all is ready and set then the EA makes a trade, currently sell (on the image

below). You can set on the parameters section your stop loss places. You can set

those just above the top/bottom line (stop-loss 1) or you can put it on the halfway

to the top (stop-loss 2).

The second entry point is based on the theory of role reversal levels, when the

neckline turns into resistance from support and vice versa. Here the entry is made

when the price rolls back to the neckline after it has been broken through.
Unfortunately, the price does not always test the neckline after breaking it through

and this will be reducing the number of entries.

Take Profit (TP) Orders

To set your take profit orders, there are two options.

1. The first take profit is based on the Double Top/Bottom pattern. The take

profit equals with the neckline and with the double top/bottom:

Double top and take profit distance from the neckline have to be equal
NB: There is not two stop losses, you can choose between those two places.

2. The second take profit opportunity is the well-known risk/reward ratio based on

the stop loss area. Examples about Risk/Reward

1:2 Risk Reward ratio: 1:3 Risk Reward ratio:

10 Trades – 40% win 10 Trades – 30% win

Lose 6 (6 x €100) = €600 Lose 7 (7 x €100) = €700

Win 4 (4 x €200) = €800 Win 3 (3 x €300) = €900

Profit +200€ Profit +200€