HOW TO TRADE DOUBLE TOP AND DOUBLE BOTTOMCHART PATTERN

in-depth tutorial

DOUBLE TOP EXPLAINED

DOUBLE TOP ILLUSTRATION

Bearish "Double Top" chart pattern illustration
Direction: Reversal
Type: Bearish
Occurrence: High
Common term: Medium - Long

DOUBLE TOP PRICE ACTION STRUCTURE

  • In an uptrend, price action finds first resistance 1, where it reverses direction and goes downwards till finding support 2.
  • Price action reverses direction from 2 and goes upwards till finding second resistance 3, which will be -around- the same rate of the first resistance 1.
  • The pattern is completed when price action reverse direction from the second resistance 3 and goes downwards till it breaks the lower support at point 4.

NOTES ON DOUBLE TOP

  • Pip distance of the prior trend should be noticeably longer than the pattern formation.
  • After the breakout, retesting the pattern's lower support that turned to resistance is highly possible.
  • Volume is usually high when reversing from the second resistance 3, as well as when breaking the pattern's lower support.
  • This pattern is commonly found on medium and long-term time-frames.

HOW TO TRADE DOUBLE TOP

  • Trade entry: the pattern is traded after price action breaks the pattern's lower support at point 4.
  • Take profit: identified by measuring the (upper border - lower border) distance, which is the vertical distance between point 2 and either (1 or 3 - according to which one was used to define the upper border), that measurement is then applied from the breakout point 4.
  • Stop loss: the pattern's support 2 which turned into resistance after the breakout.

DOUBLE TOP REWARD:RISK

  • R:R will depend on the (entry rate - lower border) distance, compared to (upper border - lower border) distance.
  • Always remember that the stop loss level explained above is absolute, the actual stop loss rate for your trade setup should be a bit beyond that level to give the trade setup some room to breathe, and of-course calculations for position size and R:R should be done with respect to that rate.

DOUBLE TOP REAL EXAMPLE

Real example for a bearish "Double Top" chart pattern, using the daily chart of EUR/USD on Oanda's MT4 platform
Currency pair: EUR/USD
Timeframe: D1
Breakout: 22-May-2014
Platform: MT4
Broker: Oanda

DOUBLE TOP FOREX TRADE SETUP

  • Trade entry: at the closing rate of the candle after breaking the lower border at point 4
  • Take profit: 245.8 pips - usual measurement applied from point 4
  • Stop loss: 110.1 pips (R:R 2.233) - set at 21% of target measurement, beyond absolute SL

NOTES ON THIS TRADE SETUP

  • Price action retested the breakout level twice before heading to target.

DOUBLE BOTTOM EXPLAINED

DOUBLE BOTTOM ILLUSTRATION

Bullish "Double Bottom" chart pattern illustration
Direction: Reversal
Type: Bullish
Occurrence: High
Common term: Medium - Long

DOUBLE BOTTOM PRICE ACTION STRUCTURE

  • In a downtrend, price action finds first resistance 1, where it reverses direction and goes upwards till finding support 2.
  • Price action reverses direction from 2 and goes downwards till finding second resistance 3, which will be -around- the same rate of the first resistance 1.
  • The pattern is completed when price action reverse direction from the second resistance 3 and goes upwards till it breaks the upper support at point 4.

DOUBLE BOTTOM REAL EXAMPLE

Real example for a bullish "Double Bottom" chart pattern, using the daily chart of AUD/USD on XM''s MT4 platform
Currency pair: AUD/USD
Timeframe: D1
Breakout: 10-Sep-2013
Platform: MT4
Broker: XM

DOUBLE BOTTOM FOREX TRADE SETUP

  • Trade entry: at the closing rate of the candle after breaking the upper border at point 4
  • Take profit: 245.9 pips - usual measurement applied from point 4
  • Stop loss: 166.6 pips (R:R 1.476) - set at 21% of target measurement, beyond absolute SL

NOTES ON THIS TRADE SETUP

  • Price action retested the breakout level right after entry, before heading to target.