Trading on Double Top
From the name, it is clear that the pattern consists of two peaks that form at the top of an uptrend which then turns to the downside. The chart moves in a sideways channel bouncing twice from the resistance line. This level is built at the tops of both peaks.
The fact that the price was unable to break through the resistance indicates the weakening of the bulls and the imminent start of the downtrend.
The support level is drawn at the low price of the tough between the two peaks of the figure and is called the Neckline.
Open a short position after the price crosses the support level. Typically, the price moves down a distance equal to the distance from the neckline to the tops of both peaks. It's worth setting an exit point here.
It is also worth noting that after breaking the support level, the price often comes back for retesting. When it turns down again, you can enter a second short position
Double top
Let's take a look at the example above:
- Green circles mark two peaks and form the resistance level
- A support line is drawn at the low between the peaks (blue circle)
- At the red dot, the neckline is broken to the downside. That’s where you open your sell trade.
- Price comes back for retesting (yellow circle) but then goes down again. At this point, you can enter your second short trade.
- The black line marks the height of the channel. The same distance is used to determine the exit point.
Trading on Double Bottom
This figure is the complete opposite of the previous one. The Double Bottom forms after a bearish trend. The price tries twice to break through the support line which is based on the lows of the sideways corridor. This gives a signal that the bearish pressure has weakened and the trend will soon change to a bullish one.
The resistance line (or neckline) forms at the high between the two descending peaks. When the price breaks this level to the upside, you can enter a long position.
Double bottom
The market often returns down to the neckline. When the price bounces back from the level that has now become support, you can open a second buy trade.
The exit point should also be set at a distance equal to the height of the pattern peaks.
Signal Confirmation
Double Bottom and Top patterns give a fairly accurate signal. However, you should not enter a trade without confirmation. The most popular tools to help you out:
- Trend indicators will give you a signal of a new trend formation.
- An oscillator (like RSI) gives an oversold signal for a Double Bottom and overbought signal for a Double Top.
- Check the volume. It grows when the price moves from the second peak to the neckline in both patterns.
Double Tops and Bottoms are a simple and surefire way to spot a trend reversal. It's time to apply your knowledge to trading!