How to Trade Double Bottom and Top Reversal Patterns


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Video Transcript:

Hello, traders. Welcome to the third module of the Advanced Technical Analysis Course Torque Patterns. In this lesson, we’re going to teach you how to trade double tops and double bottoms, which are very strong reversal signals, so we are going to be countertrend trading here.

Let’s start with the entries, the stop losses and the targets are the double tops and double bottoms, and this is how we trade these reversal patterns. Whether you are trading a double top or a double bottom, you should always wait for the breakout of the neckline, and the neckline is the low formed after the pullback from resistance on a double top or the high formed after the pullback from support on a double bottom. Here’s an example of a double top neckline breakout.

How to Trade Double Tops

As you can see, we are in an up mode, and we hit this resistance area and we pull back. Then, after the pullback, we hit the resistance area again and the resistance zone held because of the bull bearish pressure that we found at these levels. When the neckline breaks, the neckline, remember, that is the low formed from the pullback of resistance; we have an entry to go short on this reversal pattern signal. Of course, if we are trading a double bottom at support, you should wait for the pullback and for price to make a new high, and then a retest of support when price breaks with the high or the neckline of the double bottom, you have a long entry.

Now, the stop losses on these patterns are very easy to place. When we have a breakout and an entry, the stop loss should go above the double top on a bearish signal. On a bullish signal or a double bottom, the stop loss should go below support. This is easy to understand. As you can see here, we have a double top in play and a neckline breakout. When we have the neckline breakout, we have a signal to go short and our stop losses levels should be above the double top or above the resistance level that was rejected. Why? Because if we enter here, and price fails to go lower and breaks with this double top or these double highs or these flat highs, our short-trade idea is invalid because we will be making new highs. Okay? New higher highs.

Of course, if you put your stop loss level just a few pips above your entry or above the neckline breakout, this stop loss is not wide enough because price might come back and retest this breakout zone before continuing lower. If you put a not wide enough stop loss level, you might get stopped out on a good trade idea and on a trade that would have yielded a profit. You have to give your trade some room to breathe and here, the stop loss level should go above resistance and, of course, on a double bottom, they should go below support.

Now for the targets: The calculation of the targets is fairly straightforward. When calculating a double top or double bottom’s target, you should measure from the resistance or supporting double bottom, of course, level to the neckline. When you have the measurement in pips, you should extrapolate it to the breakout zone. Now, here’s an example: well, it is the same example.

As you can see here, we made this high. We pulled back and we retested the same area of resistance that was rejected. This gives us a double top and we measure from his high to this low. This is the neckline. We draw a horizontal line at the neckline and at the point of the breakout we extrapolate the same measurement to have our targets. As you can see, this gives us a pretty nice risk to reward ratio on a high probability setup. Remember that when trading these breakouts, we are just trying to profit from the momentum of the move. When these breakouts happen, the price tends to move faster in one direction, so you have to be fast also to enter your trades and to exit them with your calculated targets. Remember that once you plan your trade and you enter the trade, you should stick to your plan and trade your plan.

Double Top Chart Pattern Example

Now, let’s have a trade analysis on a double top. As you can see here, we are in a steep up trend, and we just made a new high and tested this area of resistance. This candlestick, which is a dodgy candlestick, gives us a signal that this area might be rejected, so we wait. As you can see, this area was rejected but then we made this low right here, and after seeing this, we can assume that price is going to retest this area and maybe break with this high, so we need to wait. As you can see here, price tested this area again nicely and we have another dodgy candlestick formed at resistance, so we might think that this area of resistance was rejected twice which would give us a double top for us to go short on the asset. Some people might be too aggressive or some traders might be too aggressive and just short here at this level but if you want a really high probability setup, you need to wait for the neckline to break.

Now you can see here that we have a double top. We tested this area of resistance twice and we have the neckline at this low right here. The first thing we’re going to do is we’re going to calculate our targets, right? Our targets are calculated from this high to this low, or from the resistance area to the neckline. Remember that in a double bottom, you calculate your targets from the support area to the neckline. In this case, we are in a double top and we’re going to calculate it from the resistance area to the neckline, and here we have a 60-pip range. What we do is we go to the neckline and we extrapolate the 60 pips to the downside to get our targets. Okay? Now we wait for price action. Boom.

As you can see here, when we break with the neckline, we have an entry to go short and to profit 60 pips from the breakout of this reversal patterns. This reversal patterns occur very often and if you’re monitoring more than one asset or financial instrument, you might get at least 3 or 4 of these breakouts per day if you are day-trading the 50-minute charts to the 1-hour charts. If you are focusing your strategy solely on chart patterns breakouts, I can say that if you have discipline to wait for the breakout and to get out at the calculated target, you will be trading a very profit-bearable strategy.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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