How to Trade Double Tops and Double Bottoms

The two peaks are separated by a minimum in price, a valley.

The result from these two trades equals 0. 

One reason why many traders find chart trading attractive is because these patterns can offer precise entry and exit points based on the rules of each pattern. After creating the second top, the breakout through the signal line is the confirmation signal of the pattern.

Price Target 

The double bottom can be a fast moving pattern so traders will want to see price rally after a few bars. After entering long into the market, traders will place a protective stop a few pips below the lowest low of the pattern and a limit equal to twice the size of the stop.

After a price valley, buyers again predominate and prices rise. If traders see that prices are not pushing past their level at the first top, sellers may again prevail, lowering prices and causing a double top to form. It is generally regarded as a bearish signal if prices drop below the neck line. The time between the two peaks is also a determining factor for the existence of a double top pattern. If the tops appear at the same level but are very close in time, then the probability is high that they are part of the consolidation and the trend will resume.

Volume is another indicator for interpreting this formation. Price reaches the first peak on increased volume then falls down the valley with low volume.

A double bottom indicates the price is no longer falling, and the price is heading higher. Double Tops A double top forms when the price makes a high within an uptrend, and then pulls back. On the next rally the price peaks near the prior high, and then falls below the pullback low. It's called a double top because the price peaked in the same area twice, unable to move above that resistance area. The pattern is complete—traders may take short positions or exit long positions—when the price drops below the pullback low.

For trading purposes, short positions may be initiated when the pattern completes. It's also advisable to avoid longs, since the price could decline further. A stop loss on short positions is placed above the latest peak, or above a recent swing high within the pattern. Price Target The estimated decline is equal to the height of the pattern subtracted from the breakout point. The rationale for the double top pattern is that uptrends make higher swing highs and higher swing lows.

Once the pattern completes the price failed to make a substantially higher swing high, and then proceeded to make a new low by dropping below the prior pullback low.

What are double tops and double bottoms? A double top pattern is formed when price tries to rally and fails to break a previous resistance level and a double bottom pattern is formed when price drops but fails to break a previous support level. These chart patterns are very reliable chart patterns and can be traded in isolation. However, traders should bear in mind that there are many instances when a double top or a double bottom pattern can fail.

The reliability however ensures that the trading approach using double tops and double bottoms offers a very low risk, high reward ratio. Identifying Double tops and Double bottoms The following chart illustrates how a double top or a double bottom pattern visually looks like. Double Top and Double Bottom Pattern In order to trade the double top or double bottom patterns, the following rules must be kept in mind.

Price rallies to previous resistance level but fails to break any higher Sell on break of previous support or on retest Target is the measure of distance between the top and the bottom, projected from the break out The chart below gives an illustration of the double top pattern and the projected moves based on the distance of the prior intermediary support. Double Top Pattern Double Bottom Pattern Price drops to find support and tries to attempt for the second time to break below the established support When price fails to break the support, buy on the break of the intermediate resistance level formed Target is the measured distance between the support and resistance, projected from the break out price.

Figure 3 illustrates how to trade the double bottom pattern based on the projected price from the intermediary resistance level from previously established support level.

 

Trading Strategies Headlines 

A double bottom is the end formation in a declining market. It is identical to the double top, except for the inverse relationship in price. The pattern is formed by two price minima separated by local peak defining the neck line.

DEFINITION of 'Double Top and Bottom' Double top and bottom patterns are chart patterns that occur when the underlying investment moves in a similar pattern to the letter "W" (double bottom) or "M" (double top). Jan 03,  · The double top and double bottom patterns are two reliable chart patterns that can form either towards an exhausted trend or within a consolidation price range. Stops are usually left to the trader’s discretion/5(6). 

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Market News Headlines

Double tops and bottoms are reversal patterns. A double top signals the price is no longer rallying, and that lower prices are potentially forthcoming. A double bottom indicates the price is no longer falling, and the price is heading higher. Double Tops. A double top forms when the price makes a high within an uptrend, and then pulls back. The Double Top/Double Bottom indicators are designed to identify double tops and bottoms in TradeStation and then to monitor the market as the pattern progresses. A double top forms over a number of bars when a market makes a new high and is followed by a measured pullback.

Double-Top. A double-top occurs when prices form two distinct peaks on a chart. A double-top is only complete, however, when prices decline below the lowest low — the “valley floor” — of the pattern. The double-top is a reversal pattern of an upward trend in a stock’s price. The double top marks an uptrend in the process of becoming a downtrend. Double Top. A double top is a reversal pattern that is formed after there is an extended move up. The “tops” are peaks which are formed when the price hits a .

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