Reversal Setups

These patterns are formed after the market has had an extended move up or down and the price reaches a strong resistance or support respectively.

When trading price reaches such a point it starts to form a pattern. Since these formations are frequently formed it is easy to spot them once you learn how and begin using them. There are four types:

• Double Top
• Double Bottom
• Head & shoulders
• Reverse Head & shoulders

This learn trading tutorial will only cover double tops and bottoms, for the other 2, read this other tutorial: head & shoulders and reverse head & shoulders

Double Tops

This is a reversal pattern which forms after an extended up-ward trend. As its name implies, this setup is made up of two consecutive peaks that are roughly equal, with a slight trough in between.

This formation is regarded complete once xauusd trading price makes the second peak & then penetrates the lowest point between the highs, known as the neckline. The sell signal from this formation forms when the market breaks-out below the neck-line.

In Gold, this formation is used as a early warning signal that a bullish trend is about to reverse. However, it's only confirmed once the neck line is broken and the market moves below the neckline. Neck-line is just another term for the last support level formed on the chart.

Summary:

• Forms after an extended move upwards
• This formation indicates that there will be a reversal in the market
• We sell when the price breaks-out below neckline point: see below for explanation.

The double top look like an M Shape, the best reversal signal is where the second top is lower than the first one as cited below, this means that the reversal signal can be confirmed by drawing a downward trendline as shown below. If one opens a sell signal the stop loss will be placed just above this downwards trend line.

M Shaped

Double Bottom

This is a reversal pattern which forms after an extended downwards trend. It is made up of two consecutive troughs that are roughly equal, with a slight peak in between.

This formation is regarded complete once xauusd trading price makes the second low & then penetrates the highest point between the lows, known as the neckline. The buy indication from this bottoming out signal forms when the market breaks-out the neckline to the upside.

In Gold, this formation is an early warning signal that the bearish trend is about to reverse. It is only considered complete/completed once the neck line is broken. In this formation the neck-line is the resistance area for the price. Once this resistance level is broken the market will move up.

Summary:

• Forms after an extended move downward
• This formation indicates that there will be a reversal in the market
• We buy when the price breaks-out above neckline point: see below for the explanation.

The double bottom pattern look like a W Shape, the best reversal signal is where the second bottom is higher than the first one as cited below, this means that the reversal signal can be confirmed by drawing an upwards trend line as shown below. If one opens a buy trading signal the stop loss will be placed just below this upward trend line.

W Shaped