How to Identify & Trade Double Tops and Double Bottoms in 2021Hello Traders,
Here is some of my Favorite and Most simple Educational Chart Patterns that you should know in 2021.
In this Lesson I will Show you how to Identify & Trade These Patterns!
These patterns are seen daily in Stocks, Forex and different markets across the Globe.
I hope you will find this information educational & informative .
Your support is appreciated with a like & Comment
Lets dive Right Into it!!
What Is Double Top and Bottom?
Double top and bottom patterns are chart patterns that occur when the underlying market moves in a similar pattern to the letter "W" (double bottom) or "M" (double top).
Double top and bottom analysis is used in technical analysis to explain movements in the Market, and can be used as part of a trading strategy to exploit recurring patterns.
KEY TAKEAWAYS
A double top has an 'M' shape and indicates a bearish reversal in trend.
A double bottom has a 'W' shape and is a signal for a bullish price movement .
Understanding Double Tops and Bottoms
Double top and bottom patterns typically evolve over a longer period of time, and do not always present an ideal visual of a pattern because the shifts in prices don't necessarily resemble a clear "M" or "W".
When reviewing the chart pattern, it is important for traders to note that the peaks and troughs do not have to reach the same points in order for the "M" or "W" pattern to appear.
Double top and bottom patterns are formed from consecutive rounding tops and bottoms. These patterns are often used in conjunction with other indicators since rounding patterns in general can easily lead to fakeouts or mistaking reversal trends.
Double Top Pattern (M Formation)
A double top pattern is formed from two consecutive rounding tops. Rounding tops can often be an indicator for a bearish reversal as they often occur after an extended bullish rally. Double tops will have similar inferences. If a double top occurs, the second rounded top will usually be slightly below the first rounded tops peak indicating resistance and exhaustion. Double tops can be rare occurrences with their formation often indicating that investors are seeking to obtain final profits from a bullish trend. Double tops often lead to a bearish reversal in which traders can profit from selling at the neckline (with confirmation) to form a downtrend.
Double Bottom Pattern
Double bottom patterns are essentially the opposite of double top patterns. Results from this pattern have the opposite inferences. A double bottom is formed following a single rounding bottom pattern which can also be the first sign of a potential reversal. Rounding bottom patterns will typically occur at the end of an extended bearish trend. The double bottom formation constructed from two consecutive rounding bottoms can also infer that traders are following the Market to capitalize on its last push lower toward a support level. A double bottom will typically indicate a bullish reversal which provides an opportunity for Traders to obtain profits from a bullish rally. After a double bottom, common trading strategies include long positions that will profit from a rising Market price.
Limitations of Double Tops and Bottoms
Double top and bottom formations are highly effective when identified correctly. However, they can be extremely detrimental when they are interpreted incorrectly. Therefore, one must be extremely careful and patient before jumping to conclusions.
For example, there is a significant difference between a double top and one that has failed. A real double top is an extremely bearish technical pattern which can lead to an extremely sharp decline in the market. However, it is essential to be patient and identify the critical support level to confirm a double top's identity. Basing a double top solely on the formation of two consecutive peaks could lead to a false reading and cause an early exit from a position.
How to Trade these Patterns Correctly using the information i have given above
1. Identify The Double Top or Double Bottom
2. Wait for the market to break the previous support or previous resistance to confirm this pattern " M or W" ( as show in my chart above)
3. Be Patient & wait for the market to come back to the "Neckline" (Previous support or Previous Resistance) (as shown in the chart above)
4. When the market will reach the "Neckline area aka support/resistance" monitor the "PRICE ACTION" (in the notes on chart)
5. Monitor the PRICE ACTION for a "Change" in the Market Environment "example" ----- (HL/HH,LH/LL).
6. It is Important to monitor the "Price Action" in the neckline area for some confirmation ( Break of structure or Candlestick confirmation)
7. Always wait for proper confirmation ( at least 2-3 different types of confirmation before Entry)
8. Always Use risk Management & Practise Safe trading.
9. Patience is always the Key to Success!
10. Enjoy The profit when you finally get to ride these Patterns :)
Thanks for Reading this article, I hope that it was informative and educational As always, If you have any questions / Comment or Concern Please feel free to leave them below.
Hope to see you in the next Educational Post!
Global Fx Education
