A double top is a rise in price, followed by a temporary retracement, and then a second rise, which stalls around the same level as the original up leg.
This pattern represents a strong resistance level, where an uptrend pauses or reverses.
After the completion of the pattern, the price action resembles letter ‘M’. However, if the resistance formed by the double top is breached, the price will continue to drift higher.
How can we trade double tops?
The following example of the AUD/USD illustrates a double top formation on a five-minute chart. After an uptrend, the pair temporarily retraced, forming the first top of the pattern. Soon after that, the price ascended again, but the rally came to an abrupt stop near the previous top, suggesting a possible reversal in the trend. The second top was confirmed by a sudden drop, which occurred right after the price stalled near the previous high.
Once the double top formation is completed, we wait for a confirmation candle to validate that the reversal is in place. We enter the position at 0.8015, and place our stop slightly above the double top formation at 0.8035. AUD/USD reverses and moves in the desired direction, dropping approximately 100 pips before consolidating. Given the fact that this is a five-five-minute chart, the profits and risks are generally smaller than if the same pattern appeared on a larger timeframe.
How can we trade a double bottom?
The following example of the USD/JPY illustrates a double bottom formation on a daily chart. After a prolonged downtrend, the pair temporarily retraced, forming the first bottom of the pattern. Soon after, the price descended once again. However, the downward rally came to an abrupt stop around the identical level of the first bottom. The second bottom formed after a candlestick produced a hammer formation near the previous low, further confirming a possible trend reversal.
Once the double bottom formation is completed, we wait for a confirmation candle to validate that a bottom is in place. We enter the position on the close of the confirmation candle at 89.10 and place our stop slightly below the double bottom formation at 86.30. The USD/JPY reverses and moves in the desired direction, rising approximately 1,000 pips before consolidating.