Trade Gold Trading

Reversal Setups

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

When market price gets to such a point it starts to form a pattern. Since these formations are frequently formed it's 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 & reverse head & shoulders

Double Top

This is a reversal trade pattern which forms after an extended upward trend. As its name implies, this setup is made up of 2 consecutive peaks that are roughly equal, with a modest trough in between.

This setup is regarded complete once xauusd trading price makes the second peak and then penetrates 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 XAU USD, this setup is used as an early signal that a bullish market trend is about to turn & 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 pattern shows that there will be a reversal in the market
  • We sell when the price breaks-out below neck-line point: see below for an explanation.

How Can You Interpret 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 and lesser than the first one as cited below, this means the reversal setup can be confirmed by drawing a downwards trend-line just as is illustrated below. If one opens a sell trading signal the stop loss order will be placed just above this downwards trendline.

Trend Line Technical Indicator Trade Platform

M Shaped

Double Bottom

This is a reversal trade pattern which forms after an extended downwards trend. It's made up of 2 consecutive troughs that are roughly equal, with a modest peak in between.

This setup is regarded complete once gold trading price makes the second low & then penetrates 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 XAU USD, this setup is an early signal that the bearish market trend is about to turn & reverse. It's only considered complete/completed once the neck-line is broken. In this setup 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 formation look like a W Shape, the best reversal signal is where the second market bottom is higher than the first one as cited below, this means the reversal setup can be confirmed by drawing an upwards trend line such as shown below. If one opens a buy signal the stoploss 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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