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Forex Double Bottoms

Posted by TFNG Admin On March - 3 - 2010  
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Forex double bottoms, as well as double tops, are a strong sign that the market has tested a level and is going to change direction. The common interpretation of Forex double bottoms is that traders are buying en mass when the relative value of a currency pair gets to a given point. Forex double bottoms and double tops are trend reversal patterns. When Forex trading the Euro we will see times when the Euro falls in relation the dollar. Then it reverses and goes up only to reverse again and head back down. When it hits the second bottom is when traders will commonly go long on the Euro. Understanding the Forex markets includes understanding the use of common chart patterns such as the double bottom.

Forex double bottoms are one of the most common patters seen in Forex trading. Traders often describe double bottoms as testing and then retesting limits as well as repelling attacks as though trading were a military battle. What actually is happening is that traders are scalping profits on the way down and will continue to sell short (the Euro in the example we use) until the market reverses. Traders can profit using chart formations to plan their next buy or sell in a currency pair. Traders are also aware of fundamental factors influencing the EUR/USD pair. Whether it is Central Bank intervention or has to do with higher rates and the dollar in Forex trading there is often a bottom beyond which a currency will not fall. The support level seems to repel market movement, thus giving rise to the military terminology sometimes used.

Looking at the underlying mechanics of Forex double bottoms tells us that the relative values of currencies in a currency pair such as the EUR/USD are driven by both technical and fundamental factors. Good Forex advice is to use both sets of information in Forex trading the largest market in the world. Staying current on events that drive currency trading is a big part of how Forex trading and the Forex news are intertwined. Traders watch the news; they modify their trading and the resulting Forex market moves become part of the next Forex market news.

How to plan your trading day should include time to take in the news at the beginning as well as at the end of trading. If you are trading the EUR/USD pair you recently saw the Euro hit a double bottom and climb a bit. That made the news. However, that news was preceded by Chairman Bernanke’s testimony. The Fed Chairman will defend the recovery and job creation by keeping interest rates low. If inflation ensues the Chairman is less concerned that he would be if the US economy does not continue to recover. Traders seeing that the US could head into more inflation are less likely to buy dollars and more likely to support the Euro in their trades. Those trading the Euro are still concerned about Forex and sovereign debt as the PIIGS issue is still not resolved. Nevertheless trader concern about the Euro has a limit and the level when confidence in the Euro is strong was reached recently as the Euro hit a double bottom and reversed.

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