How to Trade Accurately Double Top-Bottom Patterns in ‘Forex & Stock’ Market

The double top and bottom patterns are commonly used technical analysis tools in the Stock and Forex market. They are formed when the price of a security moves in a specific pattern, creating a pattern that looks like two peaks or two troughs.

• The double top pattern is a bearish reversal pattern, indicating that the upward trend is about to reverse,
• While the double bottom pattern is a bullish reversal pattern, indicating that the downward trend is about to reverse.

While Double Top and Double Bottom patterns can be profitable, there are also numerous instances of false reversals. Therefore, it’s crucial not to jump into a trade every time you spot a Double Top or Double Bottom. You should only choose those with the highest likelihood of success.

So, the key question is: How can you determine which Double Top or Double Bottom reversal pattern to trade?

That’s what I’ll explain in this tutorial.

Let’s learn how to identify these chart patterns and trade them.

• Double Top

A double top is a reversal pattern that is formed after there is an extended move up. The “tops” are peaks that are formed when the price hits a certain level that can’t be broken. After hitting this level, the price will bounce off it slightly, but then return back to test the level again. If the price bounces off of that level again, then you have a DOUBLE top!

• Double Bottom

The double bottom is also a trend reversal formation, but this time we are looking to go long instead of short. These formations occur after extended downtrends when two valleys or “bottoms” have been formed.

To effectively trade Double Top and Bottom patterns, you need to follow some basic trading rules. The following steps will help you identify and trade the Double Top reversal:

• STEP 1: Identify the Trend

To spot a Double Top pattern, you must first have a bullish trend. Confirming the pattern requires the presence of a trend. Although Tops and Bottoms can occur in non-trending markets, a valid Double Top and Bottom formation should align with an existing trend.

• STEP 2: Form a Top

Any top within a bullish trend could initiate a Double Top pattern. Pay close attention to price action at swing highs on the chart.

• STEP 3: Interrupt the Trend

For further analysis, observe the price action interrupting the current trend. This interruption often takes the form of a price retracement that breaks the bullish trendline.

• STEP 4: Form a Bottom

After creating a top on the chart, the pattern must develop a bottom. This bottom may be below the bullish trendline, but it’s not mandatory.

• STEP 5: Form the Second Top

Following the formation of a bottom, the price action must establish a second top on the chart, often referred to as the retest. Ideally, this second top is slightly lower than the first, signaling a slowing or exhausted trend.

Sometimes, the two tops are at the same level, and occasionally, the second top might be slightly higher than the first, resulting in a divergence pattern.

• STEP 6: Draw the Neckline

Draw the actual neck line of the pattern by referencing the swing bottom between the two tops. Create a horizontal line at this level, forming the Double Top Neckline.

• STEP 7: Neckline Breakout

Confirm the pattern’s validity by observing if the price action closes a candle below the Neckline.

• STEP 8: Enter the Trade

With a confirmed Double Top pattern, you have the signal to enter a position. For the Double Top, open a short or bearish trade.

• STEP 9: Set Stop Loss

Protect your trades with a stop-loss order, placing it just above the second top of the Double Top reversal pattern. While these patterns often succeed, there’s no guarantee.

• STEP 10: Measure the Pattern

Now that you’re short based on the Double Top pattern, measure the pattern’s size and apply it downward from the Neckline to determine your first target.

Note that this 10-step process applies similarly to the Double Bottom reversal, with rules in the opposite direction.

There are 2 different Trend Continuation Double Top and Bottom variations!

1. Double Bottoms directly at the trend line
2. Double Tops directly at the trend line

Double tops and bottoms which occur directly at a trend line are one of the best signals you can get.

Often enough the price jumps away from the trend line and continues the trend. But if you get a double top or bottom directly at the trend line then get an even better edge. You get a very early confirmation that the next move phase of the trend has started.

The profit potential is huge because usually the next resistance/support area is far away. And on top you have a very well defined stop area below the lowest low of the double bottom and highest high of the double top.

The following sketch shows a double bottom directly at the trend line:

Trend Continuation Double Bottom

• 1st. Trend line is drawn on H4 or Daily
• 2nd. Double bottom (DB)occurs at the trend line
• 3rd. Double Bottom is in support zone of the trendline
• 4th. Double Bottom can be in H4, Daily or lower time frame
• 5th. No Preceding Climatic move need

Trend Continuation Double Top

• 1st. Trend line is drawn on H4 or Daily
• 2nd. Double Top occurs at the trend line
• 3rd. Double Top is in resistance zone of the trendline
• 4th. Double Top can be in H4, Daily or lower time frame
• 5th. No Preceding Climatic move need

• Download “TraderVersity-DoubleTopBottomTrendLine” (Zip/RAR File).
• Copy mq4 and ex4 files to your Metatrader Directory …/experts/indicators/
• Copy the “TraderVersity-DoubleTopBottomTrendLine.tpl” file (template) to your Metatrader Directory …/templates /
• Start or restart your Metatrader Client.
• Select Chart and Timeframe where you want to test your forex system.
• Right-click on your trading chart and hover on “Template”.
• Move right to select “TraderVersity-DoubleTopBottomTrendLine” trading  system and strategy
• You will see “TraderVersity-DoubleTopBottomTrendLine” is available on your Chart

TraderVersity-DoubleTopBottomTrendLine trading system scans and provides BUY and SELL arrow signals and alerts for forex and Stock trading.

The TraderVersity-DoubleTopBottomTrendLine system  scans the price charts automatically and identifies the best double top and double bottom pattern trading opportunities. Moreover, the indicator confirms the price breakout after the pattern and provides BUY and SELL arrow trading signals. So traders can focus on trading the pattern, rather than searching for one.

The trading system works well for new and advanced traders. New traders will find it easy to spot the patterns, while advanced traders can combine support and resistance, channel breakouts, and trendlines for additional confirmation of the pattern. The pattern works well in all intraday chart time frames and daily, weekly and monthly charts, with higher time frame charts producing bigger, tradeable patterns.

 

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