How to Trade Double Tops and Double Bottoms

Double Top

A double top is a reversal pattern that is formed after there is an extended move up.The “tops” are peaks which are formed when the price hits a certain level that can’t be broken.After hitting this level, the price will bounce off it slightly, but then return back to test the level again.If the price bounces off of that level again, then you have a DOUBLE top!

In the chart above you can see that two peaks or “tops” were formed after a strong move up.This is a strong sign that a reversal is going to occur because it is telling us that the buying pressure is just about finished.With the double top, we would place our entry order below the neckline because we are anticipating a reversal of the uptrend.Looking at the chart you can see that the price breaks the neckline and makes a nice move down.

Double Bottom

The double bottom is also a trend reversal formation, but this time we are looking to go long instead of short.

You can see from the chart above that after the previous downtrend, the price formed two valleys because it wasn’t able to go below a certain level.This is a sign that the selling pressure is about finished, and that a reversal is about to occur.The price broke the neckline and made a nice move up.