Trading double tops and double bottoms can be simple and very profitable. You only need a few tools in your trading arsenal to do this and it works across all time frames.
Both the double top and the double bottom are an indication of an upcoming trend reversal and buy/sell exhaustion. These patterns are very easy to spot on a price chart.
Why Do Double Tops & Double Bottoms Work?
Understanding the psychology behind any price pattern will give you more confidence in trading that specific pattern. The double top and double bottom use psychology in trading because you can see when other traders are in emotional and financial pain.
A double top/bottom works because traders wait for proof that a support or resistance level is holding before they execute a trade. After the double top or double bottom pattern has been formed, it becomes more clear for everyone that a support or resistance level has formed, and thus they are willing to devote their trading capital to a trade.
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 frequently, it is easy to identify, and is seen in all currency pairs.
The double bottom pattern begins with a downtrend that creates lower lows. But prices then 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.
How to Trade a Double Bottom Pattern?
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 level that was broken becomes a new support and the prices are expected to move higher.
A 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 set in confirming this pattern is 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. In addition, the double top pattern is a reversal pattern, meaning that it has to have a prior trend to reverse.
Secondly requirement. We need a peak followed by a pullback to form a support level.
Lastly, 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 of the first bottom. All this before it reacts to a power price lower again.
How to Trade A Double Top Pattern?
A short trade should be triggered either as soon as we break below the support or on a pullback. Only do this after the support level has been broken, and the double top pattern has been confirmed. A 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 to trade, and they are very easy to spot on a price chart. And they appear frequently. It is wise to only trade the ones that fit 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.