Double top / double bottom - the nuances of working with a pattern
Good day, ladies and gentlemen, forex traders. In today's video tutorial, we will talk about the secrets of working with the classic graphic pattern “Double Top / Double Bottom”. This pattern is common, mentioned in many books about forex, but few know how to trade it correctly.
Hello ladies and gentlemen, traders. In this video tutorial, we’ll talk about such a graphic formation as a double bottom or double top. This pattern is very common. It is a reversal. And in this lesson we will talk about how to enter the market when this pattern occurs. How to set stop loss, goals. How not to fall for the false double bottom / double top pattern, which you should pay attention to. As well as the characteristics of the most adequate assessment of this pattern.
What is a double bottom or double top?
This pattern appears when the price reaches some values, draws a maximum, then goes down for some time. Then it returns to approximately the same level and draws the same maximum at approximately the same level as the previous one, and then turns around and goes down. This is the case with double top.
And in the case of a double bottom, as for example in the figure above, the price reaches certain values. He draws a minimum, then goes up for some time, and then returns to about the same level and turns around again, drawing us a second minimum. And after that, the price begins to rise. This pattern will be called double bottom. Well, in the case when the price goes down, drawing us two highs, this double top.
I think it’s understandable: in the case of a double top, this pattern is a reversal and subsequently contributes to the downward movement of the price. In the case of a double bottom, this pattern, again, is a reversal, but contributes to a further increase in the price, because it goes up. Accordingly, the “double bottom” pattern reverses the bearish trend, the “double top” pattern reverses the bullish trend.
What is worth paying attention to?
Suppose you had some purchases open, you saw a double top and, accordingly, decided to go out. So, how to determine whether this is a qualitative pattern or not?
Firstly, you should pay attention if the level of support / resistance is also located at the level of a double bottom, or a double top. In this case, we have one peak, the second and you can pay attention to the fact that there is a level nearby. And he, in fact, is practically superimposed on our double top.
This gives extra strength to the pattern and it becomes more meaningful. Secondly, there must be at least six candles between the two peaks. That is, the peaks should not go literally one after another.
There should be at least 6 candles between the peaks. To make it visually look like 2 peaks or troughs, and not 2 or 3 candles standing nearby. But at the same time, keep in mind that if the second peak is very far from the first, then this pattern is most likely not a pattern and it is just a coincidence, and most likely you will not see any strong trend reversal. Correction, perhaps, but no more. Accordingly, the farther the first vertex is located from the second, the weaker the pattern. Because the significance of the graphic formation is simply lost in time.
What is interesting and what many newcomers come across is that they believe that a double top, or a double bottom, is formed only if the prices are almost the same. Let's say that hi reached 1, 6245 and the previous peak is 1.6245.
It’s only if, in the case when the prices are absolutely equal, only in this case the pattern is considered correct and it is worth taking a deal. Quite the contrary, if the prices of the peaks or the bottoms are very, very close, literally almost to the point, then most likely, this pattern is false. It should be a little ugly. As in the figure below, when one vertex is higher than another, or lower than another, but they are not identical.
If the peaks are identical, the price is very, very close to the values of the previous peak, or the bottom of the previous one, then this is most likely a false pattern. And you won’t get any serious movement. There will be a correction, but you will not see any large movements. You should not count on them.
Therefore, if you see a double top pattern, or a double bottom and at the same time the prices of the peaks, or the bottoms are almost identical, then it is better not to enter into such a deal, it is better not to consider such a pattern. As for the location of the peaks, or the bottoms relative to each other. If the maximum price decreases, for example, the first peak was at the same level, and the second peak was slightly lower, then there is a high probability of continued downward movement.
If we have a double bottom pattern and the second bottom is slightly higher than the first, then in this case our chances that the price will go up increase. As I said, the farther the distance between two bottoms or peaks, the less likely it is that the pattern will work hard. There will be not some small correction, but a strong upward movement if it was a bottom or down if it was a peak.
Therefore, try to select deals in which the second touch is, as far as possible, lower than the previous one. On the contrary, in the case of a double bottom.
Interestingly, sometimes you can meet on the forums, or some articles mention the pattern triple bottomeither triple top. There is nothing supernatural in it, the same as a double bottom, but we have three touches. The triple bottom pattern works the same as the double bottom pattern. Accordingly, a triple vertex works just like a double vertex. Therefore, no difficulties should arise here. But most often there is a double bottom and a double top. If you are looking for strong turns, then pay attention to the space on the left. That is, there should be such an empty area to the left of the price and the trend should be quite strong and continuous.
And if the reversal really takes place, you can catch a very, very large movement. And if, on the left, the space looks filled, then, accordingly, you should not count on some kind of strong reversal. But strong global U-turns are not so common, so it’s not easy to catch them anyway. Since they themselves arise quite rarely.
How to enter the market?
Let's look at an example of a double bottom. Since we know this reversal pattern. We formed the first peak, then the second peak formed and the price went up. You do not know what to do, to enter or not to enter, when to enter, where to put stop loss and take profit.
How will we enter the deal? To begin with, we are building a trend line of the previous trend. Moreover, it should capture the maximum preceding the second bottom. In this case, we had a downward trend, which means that our trend line will be built like this. Next, we set the horizontal line at the level of our last maximum, preceding the second bottom, again.
And measure the distance from the level of two bottoms to our last maximum. In this case, 380 points.
We will enter, you guessed it, during the breakdown of our trend lines. And our goal will be: the distance from the last maximum to the level of our last doni. We had 380 points and, accordingly, we measure it from the entry point. That is, our goal will be broken, approximately, here.
The average breakdown entry. And you can place, of course, pending orders, it’s not necessary to sit in front of the monitor and wait for this breakdown to occur and the stop loss will be approximately at the level of our two bottoms, slightly lower. Moreover, this is just an interesting point. If we have some direct pinbar that stands out, as in this case, then it is not necessary to put it below the low, because, in this case, the stop-loss will most likely be very large. Slightly lower than the general level of two dons Here, and so we will look like a deal. In this case, about 380 points was take profit and about 235 stop-loss points. This could be a deal.