Double Top and Double Bottom for trading

The Double Top and Double Bottom is a popular chart pattern that is responsible to most of trend reversals. It is also called the 'M' pattern, as its shape resembles the letter M. It is the most popular chart pattern of all, and appears in most FOREX pairs, Commodities and Stocks. It is also the easiest pattern to spot and trade. You may have heard about this pattern – I encourage you to forget all you have learned. You will learn here the most solid and profitable method of trading the Double Top, and I encourage you not to trade it in any other method as it is the most consistent one. Hit Rate: 82%. After pullback 82% of the trades reach the projected target. Appearance: The double top is created when price touches the same Resistance level twice. Simply put, price touches the same price level twice, unable to break through it. Price may create a support level between the two tops – called the

neckline. Eventually, price breaks downwards and a bearish trend begins.

Examples of Double Tops:

Double Top and Double Bottom for trading

The neckline level is drawn on the charts.

Psychology: Buyers have tried to break the level twice, each time without success. After these two times the sellers have demonstrated their strength and they push price down into a reversal of trend. At the first top the buyers still have strength and attempt to break the high level again. However, at the second top the sellers are gaining strength and push prices downwards. Note: until the price has not broken the neckline, the pattern is not yet validated. In some cases price tests the level again, forming a Triple Top.

How to Trade: While there are several known methods of trading the Double Top, we will concentrate only on the safest and most profitable one – the pullback method. It is the most profitable trading method and has the highest hit rate of all.

The basis of this method:

1. Wait for price to break the neckline level.

2. Wait for price to go back up and touch the neckline from below. It occurs at around 33% of the double tops. If it does not occur, do not trade this pattern.

3. Wait for price to create a bearish candle. This candle is used to confirm that price is indeed pulling back and continuing the movement downwards.

4. After a bearish candle, enter Short trade.

5. Stop loss should be placed 1 pip above the highest high of last 4 candles. Important: Your stop loss is not related to your trade size, and is calculated in the formula. After setting the stop loss, calculate your trade size so your loss will be between 1-3% of your account.

6. Take profit is calculated in the following method: calculate the distance between the highest high of the double top and the neckline. This is the size of the double top, and is the profit target for the pattern. Subtract this amount from the pullback location, to get the take profit location. You can use these rules to trade the invert variation of the Double Top – the Double Bottom. All rules and psychology are the same – just reversed. Trade direction is bullish.

Examples of trades: