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Reversal Setups

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

When market 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 start using them. There are 4 types:

  • Double Tops
  • Double Bottom
  • Head & shoulders
  • Reverse Head and shoulders

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

Double Top

This is a reversal pattern which forms after an extended upward 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 XAUUSD, 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 trading chart.

Summary:

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

How Do You Analyze Various Types of Candles Pattern Signals?

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 setup can be confirmed by drawing a downward trend-line as illustrated below. If one opens a sell trading signal the stop loss will be placed just above this downwards trend line.

Trend Line Technical Indicator Trading Platform

M Shaped

Double Bottom

This is a reversal pattern which forms after an extended downwards trend. It's 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 neck-line. The buy indication from this bottoming out signal forms when the market breaks-out the neckline to the upside.

In XAUUSD, 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 neckline is the resistance zone for the price. Once this resistance zone is broken the market will move up.

Summary:

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

Reversal Chart Setups: Double Tops on Charts and Double Bottoms on Charts

The double bottoms pattern setup 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 setup can be confirmed by drawing an upwards trend line as shown below. If one opens a buy trading signal the stop loss order will be placed just below this upward trend-line.

Reversal Chart Patterns: Double Tops on Charts and Double Bottoms on Charts

W Shaped

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