How To Trade Double Tops And Bottoms
The RIGHT way
Trading Chart patterns might be the easiest way to start learning how to trade a strategy. It can help traders to remain objective because there are certain boxes a pattern needs to tick before it can be considered a high probability trade.
There are many ways to trade the same thing in Forex but some ways are… better than others.
Double tops and Double bottoms are reversal patterns so we have to be very careful how, when, and where we trade them. When approaching any reversal strategy we need to have a very robust money management system in place. SO! Pay attention cause this is where it gets a little COM-PLI-CA-TED.
We need to understand what Chart patterns tell us and so we can decide how to trade them. A Double top forms when price has been going up for some time and meets resistance at some point and retraces down a little, starts to move up to test that resistance again. When price fails at that resistance and spirals down price has made an “M” shape called a Double top. A Double bottom creates a “W” and is treated the same way just in reverse.
If you decide to trade Double Tops/Bottoms in context (with the trend) your trades will be far and few in between because in a good trend price usually doesn’t bounce twice before blasting off or breaking through the floor. So if we want to trade a good sample size, we are going to need help deciphering high probability set-ups from lousy reversal signals. The MACD is the tool we are going to use to do that.
Buying a Double Bottom
Entry (Buy Position)
1. Identify a support level being tested for the second time
2. Check the MACD for possible insufficient momentum
3. Enter, IF MACD starts to change direction on the second leg of the Double top at the same resistance level
Exit (Buy Position)
1. Place a stop below the swing low of Entry OR low of the first leg (Whichever is lower)
2. Take off some of your position and move your stop to break-even once the neckline of the “W” has been broken
3. Take-off most of your position once the origin of the first leg has been reached
(Source – TradingView)
With the two yellow lines, we compare two swing points. On the chart, we identify a level of support that is being tested for the second time. With the help of the MACD, we see that the momentum of the second leg is very weak so the chances of it breaking that support are low, making this a high probability BUY opportunity.
We enter on the green line when the MACD suggests that price is failing to break through that support. Set your stop below the yellow line.
Once the solid red line (neckline) is breached we then move our stop to break-even and take some profit off the trade at this point.
As price continues to move in our favor, we take most of the buy position off at the red dashed-line because that is the origin of the swing high of the first leg of the double bottom.
Selling a Double Top
For a Sell position, we completely reverse the Plan above.
(Source – TradingView)
We compare two swing points with yellow lines and the MACD shows us that price may not have enough momentum to break that resistance (Price did break the resistance but couldn’t stay above it which is a big reason to sell).
We enter a sell position at the RED horizontal line and work a stop above that high.
We take some off at the solid GREEN and move our stop to break-even.
And finally, take most of the position off at the dashed GREEN line and leave a small piece on just in case price goes even more in your favor. Always.
That’s it. Simple Plan, but it needs a concrete will to follow every rule to the Tee on repeat.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.
Double Tops And Bottoms FAQ
A chart pattern wherein price is retesting a level of resistance for the first time and is expected to fall to create new lows. If you visualize this pattern it looks like an “M”.
A chart pattern wherein price is retesting a level of support for the first time and is expected to fall to create new highs. If you visualize this pattern it looks like an “W”.