Forex Investment and Currency Trading

Double Tops and Bottoms

Another important reversal pattern is the double top (or double bottom). This is essentially a head and shoulders without the head. One important difference is that while a head and shoulders is more dramatic, it is also less strict in its definition. The neckline need not be horizontal but can be on an angle. The double top and bottom requires that it be based on a true support or resistance level.

This pattern requires patience because prices have two hurdles to overcome before a long-term trend can be established. First, the current down trend must be broken. If it does, this market is likely to rise to the previous highs. Next, it must break that resistance level. If it does not, the double bottom did not do its job. Chart patterns by themselves can be misleading so confirmation is required.

Divergence

Divergence on a chart exists when the relative trends of price and of studies are moving in different directions. For example, if the price of Gold is making higher highs (trending higher) and an oscillator study on Gold is making lower highs (rending lower), a bearish divergence exists. Divergence can be bullish or bearish, depending on the relative directions of the price and studies. Typically, divergences are resolved when the price moves in the direction of the study.

For divergences in overlays, such as money flow, look for times when the relative direction of the two lines are different. The absolute divergences are not significant, only the relative shapes of the lines.