The Double Top and Double Bottom are reversal patterns. Both patterns are very popular as investors are looking for a new trend, since the current trend is showing signs of a reversal. These chart patterns often create a chart what looks like a "W" (for a double bottom) or an "M" (double top).

The Double Top:

Characteristics of this pattern are that we have an attempt to break above the previous high, but the horizontal resistance holds the price and a new trend begins. As a result, we have two consecutive peaks, which are more or less equal. Recently, we had a very good example of double top pattern in NZD/USD (Picture 1). As you can see, the first element of the Double Top is that the price creates a first top. Then, it falls down and starts creating another move up. The point where the prices reverses to support after the first fall and starts ascending to create another top. The support is important for the final stage where we can measure the TP level.
In the second part, the price starts to move back up towards the resistance. IF the price stalls at the previous resistance and sells off, we have only two elements of the Double Top pattern in place and we still need a confirmation.


Picture 1. NZD/USD creating a double top formation

Now we come to the phase where the traders make mistakes all the time. Once they see the chart, they only see two tops. By seeing this, they sell the price and wait for the continuation to the downside. However, the Double Top Patten is not confirmed UNTIL we have the break of the support line. As it can be seen on the Picture 2, the price creates double top and then breaks the previous support. Again, similar to the H&S pattern, the higher the volume is when the price breaks the support level, the better chances of the break are. This is a perfect example of Double Top pattern.


Picture 2. EUR/USD completed a Double Top formation

After the breakthrough, there are two chances to enter the trade. First one is as soon as the price breaks and closes below the previous support, while the second one is after the price comes back up to re-test the previous support, now turned into the resistance. However, not every time this chance is available as the price sometimes descends quickly below the previous support. Now we are into the trade and we need to measure where do we exit and take profits. The distance between the double top and the support is then copied and we identify the take profit (the fifth circle on the picture 2). Again, this EUR/USD chart is a perfect example of the Double Top pattern. Those who used this opportunity came better off for around 300 pips. Ideally, on a daily chart, the distance between two tops should be at least one month. This timelines allows the price to create perfect swings.



Double Bottom patterns


This is the opposite chart pattern of the one explained above and signals a reversal of the downtrend into an uptrend. It is characterized by the downtrend move, where the price finds a support and then rebounds. That move upwards is finished after we have a sell-off and a resistance created. The next stage is another move downwards where the price stops at the horizontal support, facilitated by the previous bottom. The picture 3 shows a completed long-term double bottom pattern.

Picture 3. GBP/USD completed a Double Bottom pattern

After the price held at the horizontal support it moves upwards towards the resistance. It stops at the first attempt and retraces but then moves above the resistance in the second attempt. Again, similar to the Double Top, we can measure the TP level (a distance between the double bottom and the resistance). Also, this charts shows us that we had only one chance to enter this trade. That is immediately after the price broke the resistance level and started moving upwards. If we rode along this move, we would have gained around 900 pips in the end. Totally, it took almost 12 months for this pattern to play out. In the picture 4, you can see another example of a Double Bottom pattern in the GBP/JPY daily chart.



Picture 4. GBP/JPY completed a Double Bottom pattern
The great thing about these patterns is that the risk is very well defined. You can put your stops below two bottoms (in Double Bottom) or above two tops (in Double Top) and not risk much while also having your TP defined. As a summary, there are three key elements to look while these patterns are developing: 1) double tops or double bottoms are in place; 2) enter into the trade only AFTER the price breaks and closes below/above the support/resistance and 3) Identify TP and SL and enjoy your trade!
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