Double Top / Double Bottom - the nuances of working with the pattern

Good day, ladies and gentlemen, forex traders. In today’s article, we will talk about the secrets of working with the classic Price Action pattern “Double Top / Double Bottom”.

This pattern is common, mentioned in many books on Forex, but few know how to trade it right, how to put stop losses, take profits. How not to get caught on the wrong pattern of double bottom / double top, what to look for. As well as characteristics of an adequate evaluation of this pattern.

What is a double bottom or double top?

This pattern appears when the price reaches some value, draws a maximum, then comes down for some time. Then it returns to approximately the same level and draws the same maximum approximately at the same level as the previous one, and then reverses and goes down. This is the case with the double top.

In the case with a double bottom, such as the figure above, the price reaches certain values. Draws a minimum, then it goes up for a while and then returns to about the same level, and once again takes place, drawing us to the second minimum. And then the price starts to rise. This pattern we will call a Double bottom. Well, when the price goes down, drawing two peaks, it is a Double top.

I think it is clear: in the case of the double top, this pattern is a reversal one and fosters further a down movement. In the case of the double bottom, this pattern again is a reversal, but it fosters a further growth of prices because it is going up. Accordingly, the pattern “double bottom” reverses the bearish trend, the “double top” pattern reverses the bullish trend.

What should you pay attention to?

Let’s say you have some buy deals open, you see a double top, and accordingly decide to quit. So, how do you determine if the pattern is trustworthy or not?

Firstly, it is necessary to pay attention, if at the double bottom or double top level there is a level of support/resistance. In this case, we have one top, second and can pay attention to the fact that there is a level located close. And it is almost superimposed on our double top.

This gives extra strength to the pattern, and it becomes more meaningful. Secondly, between two tops should be at least six candles. That is, the tops should not be one after another.

Between the peaks must be at least 6 candles. It should visually look like 2 peaks or hollows, instead of 2 or 3 candles standing near. But at the same time keep in mind that if the second peak is very far from the first one, such a pattern is likely not to be a pattern, and it’s just a coincidence, and probably you won’t see any strong trend reversal. Correction is possible, but not more. Accordingly, the farther is the first high from the second one, the weaker the pattern. Because the importance of the graphic formation is simply lost in time.

What is interesting and what many beginners come across is the fact that they believe that the double top or double bottom is formed only if the prices are almost the same. Say, high was reached here at 1,6245 and the previous one on 1,6245.

But in the case that the prices are equal, the pattern is correct and you should take the deal. On the contrary, if the prices of tops or bottoms are very, very close, literally almost in the same point, it is likely that this pattern is false. It must be a bit imperfect. As on the picture below, when one high is higher than the other, or below the other, but they are not identical.

If the tops are identical, the price is very, very close to the values of the previous peaks or the previous bottom, then most likely, it is a false pattern. And you won’t have any serious traffic. There will be a correction, but you won’t see any big motion. You shouldn’t rely on it.

Therefore, if you see a double top or double bottom pattern and at the same price highs or almost identical bottoms, then it’s better not to enter such a deal, this pattern is better not to be considered. With regard to the location of highs or bottoms against each other. If the maximum value of the price decreases, for example, the first peak was at the one level, and the second peak was just below it, then the downward movement is likely to continue.

In the case that we have a double bottom pattern, and the second bottom is a little higher than the first on, our chances that the price goes up to increase. As I said, the further the distance between two peaks or bottoms, the less likely that the pattern will work out. Not some small correction, but a strong upward movement, if it was bottoms or downward if they were tops.

So, try to select transactions where the second touch is lower as possible then the previous one. Conversely in the case of a double bottom.

What is interesting, sometimes you can see in forums or some articles triple bottom pattern or triple top mentioned. There is nothing supernatural in them, the same as with a double bottom happens, but we have three hits. The triple bottom pattern works the same way as the double bottom. Accordingly, the triple top works the same way as the double top. Therefore, no difficulties should arise. But double bottoms and double tops are more often. If you are looking for a strong reversal, then pay attention to space on the left. That is, such an empty area should be to the left of the price and the trend should be fairly strong and lasting.

And if a reversal does take place, it is possible to catch a very, very big move. And if the space on the left looks full, then you shouldn’t wait for any strong reversal. But strong global reversals do not occur so often, so it is difficult to catch them in any case. Since they appear pretty rarely.

How to enter the market?

Let’s look at an example of a double bottom. As we know, it is a reversal pattern. The first high was formed, then the second one and the price went up. You do not know what to do to enter or not to enter, when to enter, where to put the stop loss and take profit.

How are we going to enter the deal? First, we build a trend line of the previous trend. Moreover, it must capture the high, prior to the second low. In this case, we had a down trend, then the trend line will be built like this. Then, again, we put a horizontal line at the level of our recent high, prior to the second bottom.

And measure the distance from the level of the two bottoms to our recent high. In this case, 380 points.

We will enter, as you guessed, at the breakdown of our trend line. And our goal is the distance from the last high to the level of our last bottoms. It was 380 points and, accordingly, we measure it from the point of entry. That is our goal will be met about here.

Entry at the breakdown is average. And, of course, you can set pending orders, is not necessary to sit in front of the monitor and wait, when this breakdown happens and stop loss will be a bit lower than the level of our two bottoms. And, that’s an interesting point. If we have some standing out

And, that’s an interesting point. If we have some standing out pin-bar, as in this case, it is not necessary to put it on the low, because in this case, the stop loss will probably be very large. Just below the general level of the two bottoms. That’s how our deal will look like. In this case, about 380 points was a take profit and about 235 points stop loss. Such a deal could happen.

Regards, Michael

ForexTraderPortal.com