How to trade double tops and bottoms

Education

A look at a key technical analysis pattern from SimpleFX

In many cases you can easily identify a trend
reversal using a simple double tops or double bottoms pattern. In this post I
will explain you how to do it. Here’s the next episode of SimpleFX CFD Academy tutorials for beginner
traders.

Of course, the signals you (and all other
experienced trades) learn to recognize in practice can go the other way. It’s a
question of probability.

If you are confident in your chart signals
interpretation, you will be able to see when something extraordinary happens.
Especially cryptocurrencies, but the most traded Forex pairs as well, are
exposed to market manipulation.

You could see it at the beginning of April when
allegedly $100,000,000 was enough to move the largest cryptocurrency 20% up,
and start a bullish trend on Bitcoin and other altcoins. Most of the times you
won’t be able to read this kind of events from the chart.

The big actors who want to make money include
the basic patterns into their scheme of playing the small traders.
This is just another reason why you have to know the
basic patterns. Don’t miss today’s lesson where I’ll write about a pretty
straightforward double top formation and double bottom formation.

Double tops and double bottoms are variations to
support and resistance trading. They are technical analysis ABC, simple
patterns to spot.

Recognizing
a double top pattern

This trading formation occurs when the market is
trending up. As always during a bullish trend, you get retracements (temporary
price declines when some of the investors sell their assets to make a profit)
after which the market should go to the new heights.

However, if the retracement happens before
breaking the old resistance level, this may be the beginning of a double top
chart pattern.

Take a look at the example below. Here’s a
GBPCHF price action on a 5-minute chart. 

GBPCHF price action on a 5-minute chart

Image: SimpleFX WebTrader

As you can see, the price moves down once again
before reaching the previous heights. At this point, you may suspect a double
top, but if you don’t want to take too much risk (which may be a good strategy
for beginners), you could wait for a confirmation.

In this case, it does come when the price breaks
through the local support level. The double top pattern showed up, and I place
an order assuming that the price will go down at least the amount equal to the
difference between the local high and low market by my horizontal lines. I’ll
go by the book and make a SELL order here.

The double top pattern showed up

Image: SimpleFX WebTrader

Let’s take a look if it worked for me here…

It did. Not only the price dropped substantially
during the next two and a half hours, but also the pattern helped me predict a
trend reversal.

trend reversal

Image: SimpleFX WebTrader

In this case, the double top formation and the
confirmation of the pattern proved to be a clear signal and used created an
attractive opportunity for profit.

Taking
advantage of a double bottom chart pattern

Since the double bottom formation is just a
mirror reflection of a double top one, to make things more attractive, let’s
take a look at the stock chart and use candlesticks this time.

Let’s take a look at the pattern on the chart of
Tilray Inc., a popular among SimpleFX traders stock on the Nasdaq.
Once again I chose the same timeframe, where each candle represents five
minutes worth of trading.

At the moment shown below, we are in a
downtrend. Some retracements happen, then we have a rally that starts above the
last support level. This may be a sign of trend reversal.

retracements Tilray

Once again, let’s wait for confirmation. Will
the rally break the local resistance line? We may open a BUY order now, but
it’s much safer to wait for a confirmation.

Let’s see, what happens next.

local resistance line

Image: SimpleFX WebTrader

The chart broke the resistance. I decide to open
a long position assuming that the price will go up at least the difference
market by the two horizontal lines.

difference market by the two horizontal lines

This time it worked, too. In the next period, I
managed to make a 2,89% profit, before closing my position.

Of course, these are just examples, and you may
point to many historical examples where the pattern didn’t work. It’s always
the case when trading the patterns. You need to be aware that other traders use
them, but also that big influential players may want to act against them.

As usual, the devil is in the details. When
trading chart patterns, it’s crucial to adjust your stop loss levels
accordingly. In the Tilray example above I set it at the lower support level,
had I done it tighter, I would have been knocked out of my position during the
“third bottom.”

On the other hand, placing it that low made a
possible loss bigger, and if I applied maximum leverage, this could mean a
substantial risk.

Give the double top and double bottom pattern a
try. See how it works on your favorite instruments. Try tempering with
different stop loss and take profit levels, and develop a successful trading
strategy. Good luck.

This article was
submitted by SimpleFX.

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