Trading double tops and double bottoms can be simple and very profitable. You only need a few tools in your trading arsenal to trade double tops and double bottoms and it works across all time frames. Both the double top and the double bottom are an indication of a trend reversal and indicate buy/sell exhaustion. These patterns are very easy to spot on a price chart.
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Why Double Tops/Bottoms work?
Understanding the psychology behind any pattern will give you more confidence in trading that price pattern. The double top and double bottom use psychology in trading because you can see when other traders are in emotional and financial pain.
The reason why a double top/bottom works is because many times traders wait for proof that a support or resistance level is holding before they are prepared to execute a trade. After the double top or double bottom pattern has been formed it can be more clear for everyone that a support or resistance level has formed and thus they are willing to devote their trading capital.
What is a Double Bottom Pattern?
A double bottom is a bullish reversal pattern that develops around an important support level. This pattern will help you catch the beginning of a new bullish trend. This pattern happens very frequently, easy to identify, and they’re seen in virtually all currency pairs.
The double bottom pattern begins with a downtrend that makes lower lows, but prices than retrace upwards, which creates the first bottom. After the retracement, the price moves lower again and retests the first bottom at exactly the same price level or within 2-4 pips of the first bottom.
A long trade is triggered either as soon as we break above resistance or on a pullback. If the price breaks above the resistance line as is typical in chart patterns, a past resistance that is broken becomes a new support and the prices are expected to move higher. The protective stop loss is usually placed below the double bottom. For a valid double bottom pattern to be confirmed, the difference between the lowest bottom and resistance level should be at least 10%.
What is a Double Top Pattern?
A double top is a bearish reversal pattern which forms after a strong move upwards. It appears as two consecutive peaks with approximately the same price. This pattern will help you to catch the beginning of a new bearish trend. The first requirement is that you need to have an established bullish trend prior to the double top. This is important because otherwise, the double top would probably just be two equal highs in a ranging market. Besides that, the double top pattern is a reversal pattern, meaning that it has to have a prior trend to reverse.
Secondly, we need a peak followed by a pullback to form a support level. The last requirement is that after the first retracement we need to see a retest of the first peak at exactly the same price level or within 2-4 pips off of the first bottom before to react lower again.
A short trade is triggered either as soon as we break below support or on a pullback. Only after the support level has been broken the double top pattern has been confirmed. The protective stop loss order is usually placed above the double top pattern.
The double top and double bottom pattern are the most effective reversal patterns and they are very easy to spot on a price chart. Identifying double tops and double bottoms is an easy task; however, because they appear frequently you need to only trade the one that fits a proper market context.
The double top and double bottom patterns quite often will provide you with great trading opportunities in terms of the risk-reward ratio. This will ensure that your losses are always smaller than your winners.