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Double Top" and "Double Bottom" Patterns

The document discusses "Double top" and "Double bottom" patterns, which represent classic price behavior models that occur after an established trend. A "Double top" pattern indicates an established uptrend may be reversing, while a "Double bottom" signals an established downtrend may be reversing. There is believed to be strong resistance at the pattern highs/lows. The classical trading strategy is to enter if price crosses the support line, set the target to the height of the pattern, and stop loss at the pattern top. Possible reasons for these patterns include large market participants accumulating positions over multiple peaks or valleys to influence the market. Alternative strategies discussed modify the stop loss level or enter on a retest of the broken support line

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vic beckham
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321 views11 pages

Double Top" and "Double Bottom" Patterns

The document discusses "Double top" and "Double bottom" patterns, which represent classic price behavior models that occur after an established trend. A "Double top" pattern indicates an established uptrend may be reversing, while a "Double bottom" signals an established downtrend may be reversing. There is believed to be strong resistance at the pattern highs/lows. The classical trading strategy is to enter if price crosses the support line, set the target to the height of the pattern, and stop loss at the pattern top. Possible reasons for these patterns include large market participants accumulating positions over multiple peaks or valleys to influence the market. Alternative strategies discussed modify the stop loss level or enter on a retest of the broken support line

Uploaded by

vic beckham
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Double Top” and “Double

Bottom” Patterns

“Double top” and “Double bottom” patterns represent classic models of


price behavior that occur after a long-lasting trend is established,
while “Double top” pattern can be found after an established
uptrend, and “Double bottom” pattern appears after an established
downtrend.
It is believed that there is a strong resistance level, on approaching
which the price cannot keep moving, at the level of the top/bottom of
these patterns. Here is an example:
Classical Trading Strategy
In order not to confuse our readers, we’re going to describe the
classical trading strategy for “Double top” pattern, since “Double top”
and “Double bottom” patterns are mirror of each other.
Enter the market at the point (1), when the price crosses the support
line (2);
Trading target is equal to the height (H) from the top of the pattern to
the support line;
Stop order is set at the level of the pattern’s top (3).

Reasons Behind the “Double


Top/Bottom” Pattern Formation
In general, the reasons and the motives of the formation are similar to
that of the "Head and Shoulders" pattern, and only the pattern type is
different. However, we’re going to describe one of the possible options
of its formation for clarity.
Suppose that a “major” participant, who wants to buy an asset and
have a large amount of capital enough to influence the market,
appears in the market at some point in time. Such a participant may
be, for example, a large automobile holding, which task is to sell the
asset at the price higher than the market one (for example, buy euros
for settling with European partners). As a rule, professional traders of
this holding already have time-proven “maneuvers” to fulfill the task,
including methods of trading based on “Double top” and “Double
bottom” patterns.
Notably, a small volume is enough for the first impulse of “Double top”
to occur, and the remaining volume (1) is accumulated on its tops. The
last stage of the “maneuver” is the full execution of the holding’s order
that triggers the price to come back or even a trend to reverse.

Alternative Strategies for “Double


Top” Pattern
“Double top” pattern is rather complicated, because it can be identified
only when its final impulse occur. This excludes making any early
entries, like those with the “Triangle” pattern. Although we don’t
recommend trading based on the classical market entry, this classical
method is one of the possible options for this pattern, while Stop
orders’ levels differ from the classical ones.
Alternative strategies of trading and entry/exit points:
1. Classical strategy using modified Stop orders:
Enter the market (1) with the above-described classical strategy;
Trading target (TP) is set at the level of the initial point of the first
impulse, i.e. at the point (3);
Stop order (SL) is set a few points below the top of the pattern.
2. Strategy of retesting the broken support line:
Enter the market (2) if the price hits the broken support line again;
Trading target and Stop orders are the same as in the previous option.

Pattern Types

Examples of Trading “Double Top/Bottom” Patterns in Forex“Double


top” is a bearish pattern, and “Double bottom” is a bullish pattern,
but other than that, the methods of trading these patterns are mirror of
each other.
1.

2.

3.

4.
5.

Other patterns in our blog:

 Forex Patterns;
 “Head and shoulders”;
 "Wedge".

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