How to Trade Double Tops and Double Bottoms
A double top is a reversal pattern that is formed after there is an extended move up. The “tops” are peaks which are formed when the price hits a certain level that can’t be broken.
After hitting this level, the price will bounce off it slightly, but then return back to test the level again. If the price bounces off of that level again, then you have a DOUBLE top!
With the double top, we would place our entry order below the neckline because we are anticipating a reversal of the uptrend.
You’ll also notice that the drop is approximately the same height as the double top formation. Keep that in mind because that’ll be useful in setting profit targets.
The double bottom is also a trend reversal formation, but this time we are looking to go long instead of short. These formations occur after extended downtrends when two valleys or “bottoms” have been formed.
You can see from the chart above that after the previous downtrend, the price formed two valleys because it wasn’t able to go below a certain level.
Notice how the second bottom wasn’t able to significantly break the first bottom. This is a sign that the selling pressure is about finished, and that a reversal is about to occur.
The price broke the neckline and made a nice move up.
See how the price jumped by almost the same height as that of the double bottom formation?
Remember, just like double tops, double bottoms are also trend reversal formations. You’ll want to look for these after a strong downtrend.