One of the most powerful reversal patterns in any market is the Double Top and Double Bottom reversal pattern.
And it’s one of the most lucrative reversal patterns because they signify the start of a new trend.
So if this reversal turns into a strong trend in the opposite direction, then getting in when the Double Top and Double Bottom pattern is formed can allow you to catch a big part of this new trend.
However, while Double Tops and Double Bottoms can be very lucrative, there are also many false reversals.
So you definitely do not want to get into a trade every time you see a Double Top or a Double Bottom.
You only want to pick the ones that have the highest probability of working out.
So the question becomes:
How do you know exactly which Double Top or Double Bottom reversal pattern to trade?
And that’s what I’m going to share with you in this post.
By the end of this post, you will know exactly how to select the Double Tops and Double Bottoms that will give you the highest probability of working out, and also exactly how to trade them.
How to Identify Double Tops
If you’re new to trading and you’re wondering how to identify a Double Top, then think of Mcdonald’s Golden Arches.
So the next time you’re unsure whether it’s a Double Top or not, think of Mcdonald’s and if it looks similar, then congratulations, you’ve correctly identified it.
Most of the time when Double Tops appear, it’s usually at the end of an uptrend and signifies that the trend might be reversing.
Now, in a market is in an uptrend, it will form higher highs and higher lows like this:
But as the uptrend gets exhausted, a Double Top can appear at the end of the trend.
And when that happens, it’s a sign that the market does not have any more strength to push for a new high, and a reversal is possibly happening.
With that said, Double Tops can also appear in a downtrend.
While a Double Top in an uptrend signifies a reversal, in a downtrend, it usually signifies a continuation in the market going down.
Here’s how a Double Top looks like in an uptrend:
And here’s how a Double Top looks like in a downtrend:
If you noticed in both diagrams, I used the 20 EMA and 50 EMA.
By plotting these two EMAs on the chart, you’d be able to identify a Double Top more easily.
But Double Tops don’t necessarily have the same swing high each time.
In fact, there are 3 Double Top formations.
And it’s important to identify all three types because they can be very profitable when traded right.
This is something that I don’t see anyone else talk about.
So do pay attention to these 3 formations because when you identify it correctly, it can give you some of the best reversal trade setups you can have.
The 3 Formations of A Double Top
Here are the 3 formations of a Double Top:
- Double Tops with roughly the same swing high.
- Double Tops with a higher high.
- Double Tops with a lower high.
1) Double Tops with roughly the same swing highs.
Double Tops with the same swing highs are the classic type of double tops that people look for because it’s easily identifiable on the charts.
You can see in the chart above that the Double Top is very obvious with the two tops at around the same price level.
But sometimes, there are Double Tops where the second top is higher, and there are Double Tops where the second top is lower.
And that leads us to the next two formations.
2) Double Tops with a higher high.
A Double Top with a higher high is simply one with a higher second top.
However, to consider this a Double Top with a higher high, the second top must not be much higher than the first top.
If it’s significantly higher, then we do not consider that as a Double Top because it would then just be a normal uptrend wave where the market is making higher highs.
In the chart above, the second top is higher than the first top but it’s not that much significantly higher, so we can consider it a Double Top as well.
However, in this chart below, you will see that the second top is much higher.
In fact, it looks more like a normal uptrend wave forming higher highs, and not considered a Double Top.
This is very important to take note of because if you trade it thinking it’s a Double Top, and you get stopped out immediately, don’t come crying saying I didn’t warn you!
So as a general rule of thumb, if the market is forming these distinct higher highs like the one in the chart above, then you don’t want to go Short.
Because such a move usually indicates that uptrend momentum is strong.
3) Double Tops with a lower high.
Sometimes, the market doesn’t form a higher high in an uptrend.
Instead, it forms a lower high.
And this can be a signal that the uptrend is losing its momentum and the trend might be going sideways, or even reversing.
In the chart above you can see that the second top is lower than the first top.
However, it’s not that much lower, and we can consider this a Double Top with a lower high.
Similar to the second Double Top formation, we do not want a second top that is too far away from the first top.
In this chart above, you can see that the second top is significantly lower than the first top.
While in certain cases it can be a viable setup to go Short, we do not consider this a Double Top for our purposes.
How to Trade A Double Top
The way most people trade a Double Top is by going Short at the break of the neckline.
In the chart above, you can see that the neckline is drawn at the previous swing low at the price level of 80.26.
Technical traders would go Short at the break of the neckline.
And the Stop Loss would be placed just above the high of the Double Top.
I would consider this a rather conservative entry.
A less conservative entry would be to go Short at the close below the 50 EMA.
This way you can get a better entry.
However, sometimes the close below the 50 EMA might be lower than the neckline.
So it really depends on where the neckline and 50 EMA is at.
A more aggressive entry would be to go Short at the close below the 20 EMA.
With this entry, you can get a much better risk-to-reward ratio but may get more stop-outs as you are getting in when the Double Top is not fully formed yet.
Now, the market will regularly form these Double Top formations…
But you certainly do not want to trade every single one of them.
We only want to pick the ones that have the highest likelihood of working out.
So the question is…
How do you decide which Double Top to trade, and which Double Top to avoid?
How to Identify High Probability Double Top Patterns
There are two ways I use to identify whether a Double Top has a high probability of working out or not:
1) Using Bearish Candlestick Patterns
The first way to identify whether a Double Top has a high probability of working out is by looking for bearish candlestick patterns to appear at the second top.
For example, in this chart above, you can see that at the second top there is a Tweezer Top pattern.
This is a bearish candlestick pattern and together with the Double Top formation, it makes the Double Top more likely to work out.
Now, we only want to focus on the bearish candlestick patterns forming at the second top and not at the first top.
Whether the first top has a bearish candlestick pattern or not is not important.
We only focus on the second top for a bearish candlestick pattern to appear.
Now, one of my favorite Double Top patterns to trade is when there is a “fake-out” candlestick at the second top.
And what I mean by that is when the second top breaks the swing high of the first top, and then forms a Bearish Pin Bar.
That is what’s called a bull trap.
A bull trap is to trap traders who will go Long when a certain price action occurs in the market.
And in this case, many traders will go Long when the market breaks above a previous swing high.
The big players like the banks and hedge funds know that there will be people going Long at the break of the first top’s high…
So what they do is push the market a little above the first top to trigger the buy stops above the previous swing high…
And once they’ve gotten enough people to hit their Offers above that swing high, they start pushing the market down.
And thus the formation of the Bearish Pin Bar and the Double Top.
So when you see a Double Top pattern like this where the market breaks above the previous swing high, and then come back down to form a Bearish Pin Bar that closes below the low of the previous swing high…
Get excited because that is a high probability Double Top formation.
2) Using Stochastic Divergence
The other way to find a high probability Double Top formation is by using the stochastic indicator to identify divergence.
Now, there are two types of divergence:
- Regular Divergence
- Hidden Divergence
For these two Double Top formations, we find divergence using Regular Divergence:
- Double Tops with the same high.
- Double Tops with a higher high.
In both cases, the divergence we are looking for is when the stochastic indicator is forming a lower high.
In the chart above, you can see that the market has formed Double Top, but the stochastic indicator is showing a lower high.
This is a divergence.
After this, the market reversed and went down.
In the chart above, the market is forming higher highs but the stochastic indicator is forming lower highs.
This is also another divergence signal.
And the market started to go down shortly after the higher high is formed.
For the third Double Top formation, we use Hidden Divergence.
What we are looking for is for the stochastic indicator to show a higher high, while the market is showing a lower high Double Top.
In the chart above, the market has formed a Double Top with a lower high.
However, the stochastic indicator is showing a higher high.
This is a Hidden Divergence.
And if you remember, a downtrend always begins with the first lower high and lower low.
So this lower high could become the very start of a downtrend.
And in the chart above, you can see that this is true because the market started to go down after that.
So if you had gotten into this Double Top with a lower high trade, you could potentially be profitable if you ride the market all the way down.
As you can see, using the stochastic indicator to find divergence can be very powerful to identify high probability Double Top setups.
How to Identify A Double Bottom
Now that you’ve not only learned how to identify Double Tops but also now know how to identify high probability Double Top patterns, it’s time to move to the cousin – the Double Bottom.
If you know how to identify a Double Top, then you should have absolutely no problems identifying a Double Bottom because it’s just like placing a mirror at the base of the Double Top.
And again, think of Mcdonald’s Golden Arches, but an upside-down version of it like this:
It pretty much looks like a “W”.
Now, let’s get to the serious stuff.
Most of the time, Double Bottoms are found in a downtrend.
A downtrend is basically when the market forms lower lows and lower highs like this:
But similar to Double Tops, Double Bottoms can also be found in both an uptrend.
Here’s how a Double Bottom looks like in a downtrend:
And here’s how a Double Bottom looks like in an uptrend:
And like the Double Top, it has 3 formations as well.
The 3 Formations of A Double Bottom
Since the Double Bottom is an upside-down mirror image of the Double Top, it has these 3 formations:
- Double Bottom with roughly the same swing low.
- Double Bottom with a lower low.
- Double Bottom with a higher low.
1) Double Bottom with the same swing low.
The diagram above shows a Double Bottom forming in a downtrend.
Most of the time when the market is in a downtrend, the Double Bottom will form below the 20 EMA and 50 EMA.
But in an uptrend, a Double Bottom can form either below or above the EMAs.
2) Double Bottom with a lower low.
The diagram above shows a Double Bottom with the second bottom slightly lower than the first bottom.
Similar to the Double Top, we don’t want the second bottom to be much lower than the first bottom.
If the second bottom is much lower than the first bottom, then it will be considered a normal downtrend wave.
And that signifies a strong momentum in the downtrend.
3) Double Bottom with a higher low.
The diagram above shows a Double Bottom with the second bottom higher than the first bottom.
This can signify a weakening of the downtrend and could be the first higher low of an uptrend about to be formed.
But not all Double Bottoms with higher lows lead to a reversal of the trend.
So you want to know how to identify which ones to trade, and which ones to void.
Likewise, you do not want to trade every single Double Bottom that comes your way…
Instead, you only want to cherry-pick the ones with the highest probability of working out.
How to Identify High Probability Double Bottom Patterns
Similarly, there are also two ways I use to identify whether a Double Bottom has a high probability of working out or not.
1) Using Bullish Candlestick Patterns
The first way to identify a high probability Double Bottom is when there is a bullish candlestick pattern formed at the second bottom.
In the chart above, you can see that there is a bullish pin bar formed at the second bottom.
This bullish pin bar broke the low of the first bottom and closed above the first bottom’s low.
This is a bear trap, which is the opposite of the bull trap I mentioned earlier.
Similar to the bull trap, this bear trap caught all the traders that went Short when the market broke below the first bottom’s low.
After catching the traders that went Short, the market reversed and formed a Bullish Pin Bar, which resulted in the second bottom forming.
This is a high probability Double Bottom pattern and one you want to look out for when trading Double Bottoms.
2) Using Divergence
For finding divergence on Double Bottoms, we also use Regular Divergence and Hidden Divergence.
We use Regular Divergence on:
- Double Bottoms with the same swing lows.
- Double Bottoms with a lower low.
For these two formations, we are looking for the stochastic indicator to show a higher low to indicate a divergence.
The chart above shows a Double Bottom with roughly the same lows.
However, the stochastic indicator is showing a higher low indicating a divergence.
And if you noticed, there is a Bullish Pin Bar formed at the second bottom as well and it closed above the low of the first bottom (previous swing low).
This is a strong sign of reversal because there are 3 signs of confluence happening:
- There’s a Double Bottom
- There’s divergence
- There’s a Bullish Pin Bar.
While the market didn’t go up immediately, it eventually did go up as you can see on the right-hand side of the chart.
When there’s a confluence of different bullish/bearish patterns, there’s a very high probability of the pattern working out.
Next, the chart below shows an example of divergence on a Double Bottom with a lower low.
On the left-hand side of the chart above, you can see that the market had been in an uptrend forming higher highs and higher lows with the 20 EMA above the 50 EMA as well.
As mentioned earlier, Double Bottoms can also appear in an uptrend and that’s what has happened in this chart.
You can see on the chart that the Double Bottom has a lower low, but the stochastic indicator is showing a higher low.
Hence indicating a divergence.
Finally, we use Hidden Divergence for:
- Double Bottoms with a higher low.
For a hidden divergence, we are looking for the stochastic indicator to form a lower low.
In the chart above, a Double Bottom with a higher low is formed.
Notice that the higher low isn’t too far away from the previous swing low.
At the same time, the stochastic indicator is showing a lower low indicating a Hidden Divergence.
Here’s another thing that’s interesting about the chart above…
If you noticed, just before the Double Bottom with a higher low is formed, there is another Double Bottom formation before that.
That is a Double Bottom with a lower low, but the stochastic indicator is showing a higher low.
Hence there is a Regular Divergence there.
So if you had missed the entry on the first Double Bottom (with the lower low), you would have another chance to enter on the second Double Bottom (with the higher low).
And regardless of which one you traded, both would be profitable as the market eventually went up.
Double Tops and Double Bottoms can be without a doubt powerful reversal patterns.
But you only want to pick the ones that have the highest probability of working out.
In this post, I’ve shared with you the different Double Top and Double Bottom formations.
I’ve also shared with you the two ways to identify the formations that have a high probability of working out.
If you hadn’t been successful trading Double Tops and Double Bottoms in the past, then follow what I’ve taught in this post and only select the formations that have the highest probability of working out.
And if you are already successful trading both these reversal patterns, then this post will help you further refine your trade selection and increase your profitability.
It’s up to you now to identify it on your charts and then trade it.
Now, here’s my question to you:
Have you had success trading either the Double Top or Double Bottom patterns in the past?
Let me know in the comments below.
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