Reversal Chart Patterns: Double Tops and Bottoms

We have covered a lot of ground in this lesson, so let’s recap what we’ve learned about double bottom patterns. Notice how our measured objective from the double bottom low lines up perfectly with a previous support level in the market. Another issue for traders who are trading these patterns will be where they should place their stop losses. No generalized metric or indicator can tell traders how to trade a specific pattern correctly every single time. The “tops” are peaks which are formed when the price hits a certain level that can’t be broken.

After a local surge of optimism, the demand for safe-haven assets returns. The US dollar attracts attention again, and double top and double bottom markets prefer to avoid risks. Place an SL behind the high and calculate the TP based on the height of the pattern.

How to Trade the Double Top and Double Bottom Chart Pattern

Price rises no more than 10% before dropping and closing below the bottom of the chart pattern. This busts the upward breakout and the double bottom becomes a busted double bottom.

Go long on a reversal signal and place a stop-loss just below the support level. Price often rallies back to the support line which then acts as a resistance level. Go short on a reversal signal and place a stop-loss just above the resistance level. If you draw a trendline between the two retracement lows on a triple top pattern, when the price drops below that trendline it can also be used as an entry point. This is only useful if the second retracement is a bit higher than the first.

Double Top and Bottom Trading

Doing this in real-time, with the risk of losing real money, is an entirely different animal. Ultimately, it will be up to the subjective intuition of the individual traders’ experience to determine how best to execute a trade.

• A spike through the 2.5 Standard Deviation Bollinger Band does not happen very often, but when it does, it often leads to high probability trades.
• Today, we will discuss popular and rather widespread patterns of graphic analysis Double Top, Triple Top and its opposite – Double Bottom, Triple Bottom.
• Another important thing to note is that the fall is around the same height as the double bottom formation.
• An example of this would be price moving up to the second test and forming a false break pin bar or a large engulfing bar.
• However, the trader who understands to read the nuances of price movements would have seen that candles have become successively smaller on the actual breakout.

We have an uptrend, then the first major peak of the pattern, a bounce to a bottom support level, then the second major peak, then finally a reversal. If you can master recognizing support and resistance points on the chart, you can see double bottoms and double tops. The first thing to know when it comes to trading a double bottom is where to look for the entry signal. A common misconception among traders is that the entry occurs on a breakout of the pattern, when in fact the entry comes on a retest of the neckline. The chart above shows a double bottom pattern that formed on the NZDUSD daily chart. Notice how we have a well-defined neckline and two swing lows which form a nice “W” pattern.

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• A web interface is provided for user to search for particular stock and check whether a double top or double bottom has occurred.
• Price just barely broke it the second time but price left a wick showing some rejection.
• Now it’s time for the really fun stuff – how to profit from this reversal pattern.
• Remember that the average decline after a busted double bottom is just 15%.
• Here’s an example of an inverted head and shoulders pattern.
• To initiate a trade based on this pattern, you should first confirm its validity.