What Double Top and Double Bottom Chart Patterns are and How to Trade them is Fairly Widely Covered.
However, Where To Actually Trade Each Pattern Appears to be Missed and This is What I want to Cover in This Blog Post...
This fact means that traders can use these patterns to spot a possible opposite move in the markets and then profit from that move.
Also, Here is a Free YouTube Video That Takes you In-Depth Through What The Double Top and Double Bottom Patterns Actually are, Where to Trade Them, How to Identify them and a Strategy to Enter them - Using Real Time Chart Examples
So, let's just remind ourselves of what the Double Top and Double Bottom Patterns show:
Double Top
This pattern shows exhaustion from the buyers in the market. It normally occurs after a bullish move but then the buyers fail to push the market higher past a certain level twice. The fact that it is TWICE is significant because it means that this is a level that the market is failing to push above for some reason. When market participants see this it is likely that buyers will take their profits and sellers will start coming into the market decreasing the price of the market.
Double Bottom
The pattern shows almost exactly the same as the Double Top but in reverse. Also, instead of the buyers being exhausted, in the case of the double bottom it is the sellers who are exhausted. So, as sellers close their short bets and more buyers come into the market, it is likely that the price will begin to rise.
Knowing this, traders will look for these patterns in certain places in trends and that is what we are going to look at next.
Where To Trade The Double Bottom
A market can move in three ways - up, down and sideways (uptrend, downtrend and range).
It is advisable, especially when starting out to trade with the trend. This is because trends can go on far longer than anyone can stay liquid in the market and going against the tide of the market is far more likely to cost you money than help you make it.
With this in mind and looking at the below uptrend diagram...
...we can see that the market keeps coming down to (or retracing) to the diagonal line (ascending trendline). What traders will look to do is buy the market (go long) when it reaches the ascending trendline at the points labelled "trading opportunities". In this way they can profit from the increase in the market and the continuation of the trend.
So, because a double bottom signals when a downtrend may have run out of steam and may be about to reverse, traders will look for double bottoms at the "trading opportunities" points, to signal that the market might be about to rise and so they can trade long.
So, remember, in uptrends you are looking for the formation of double bottoms at the points where the market meets the ascending trendline.
Where To Trade Double Tops
In a downtrend this method is simply reversed...
In this instance traders will look to sell the market (go short) to profit from the market decreasing. To do this, they will look for double tops to form at the points labelled "Trading Opportunities" to show that the retracement to the diagonal line (descending trendline) has run out of steam and the market may be about to reverse and continue to decrease.
Rememeber, in a downtrend you are looking for the formation of double tops at the points where the market reaches the descending trendline.
Where To Trade Double Tops And Bottoms
In a ranging market, as in the diagram below...
...you have the opportunity to trade the market both long and short. When the market reaches the top of the range you can look to sell/short the market to profit from the decrease back down to the bottom of the range.
When the market is at the bottom of the range you can look to buy/go long to profit from the increase in the market back to the top of the range.
This means that at the top of the range you would be looking for a double top, which would signal that the rise to the top of the range may be about to end and reverse back down to the bottom. In contrast, when the market reaches the bottom of the range, you would be looking for a double bottom to form, which would signal that the decrease in price has run out of steam and a reversal in price may be about to happen back up to the top.
Remember, in ranging markets you can look for double tops at the top of the range to short back down to the bottom of the range and double bottoms at the bottom of the range to go long back up to the top of the range.
Ok guys, I hope you enjoyed this blog post and learnt something. Don't forget if you want more in-depth instruction about how to trade double tops and bottoms, then check out my YouTube video at the top of this page.
Also, hit the like button to let me know that you like my content and comment with any questions or queries you might have - I will try to always answer as quickly as possible.
Until next time...
