How to Trade Double Bottom and Top Reversal Patterns

August 5, 2014 by Adam posted in • No Comments

Video Transcript:
Hello, traders. Welcome to the third module of the Advanced Technical Analysis
Course Torque Patterns. In this lesson, we’re going to teach you how to trade double
tops and double bottoms, which are very strong reversal signals, so we are going to be
countertrend trading here.

Let’s start with the entries, the stop losses and the targets are the double tops and double
bottoms, and this is how we trade these reversal patterns. Whether you are trading a
double top or a double bottom, you should always wait for the breakout of the neckline,
and the neckline is the low formed after the pullback from resistance on a double top or
the high formed after the pullback from support on a double bottom. Here’s an example
of a double top neckline breakout.

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in an up mode, and we hit this resistance area and we pull back. Then, after the pullback,
we hit the resistance area again and the resistance zone held because of the bull bearish
pressure that we found at these levels. When the neckline breaks, the neckline,
remember, that is the low formed from the pullback of resistance; we have an entry to
go short on this reversal pattern signal. Of course, if we are trading a double bottom at
support, you should wait for the pullback and for price to make a new high, and then a
retest of support when price breaks with the high or the neckline of the double bottom,
you have a long entry.

Now, the stop losses on these patterns are very easy to place. When we have a breakout
and an entry, the stop loss should go above the double top on a bearish signal. On a
bullish signal or a double bottom, the stop loss should go below support. This is easy to
understand. As you can see here, we have a double top in play and a neckline breakout.
When we have the neckline breakout, we have a signal to go short and our stop losses
levels should be above the double top or above the resistance level that was rejected.
Why? Because if we enter here, and price fails to go lower and breaks with this double
top or these double highs or these flat highs, our short-trade idea is invalid because we
will be making new highs. Okay? New higher highs.

Of course, if you put your stop loss level just a few pips above your entry or above the
neckline breakout, this stop loss is not wide enough because price might come back and
retest this breakout zone before continuing lower. If you put a not wide enough stop loss
level, you might get stopped out on a good trade idea and on a trade that would have
yielded a profit. You have to give your trade some room to breathe and here, the stop
loss level should go above resistance and, of course, on a double bottom, they should go
below support.

Now for the targets: The calculation of the targets is fairly straightforward. When
calculating a double top or double bottom’s target, you should measure from the
resistance or supporting double bottom, of course, level to the neckline. When you have
the measurement in pips, you should extrapolate it to the breakout zone. Now, here’s an
example: well, it is the same example.

As you can see here, we made this high. We pulled back and we retested the same area
of resistance that was rejected. This gives us a double top and we measure from his high
to this low. This is the neckline. We draw a horizontal line at the neckline and at the
point of the breakout we extrapolate the same measurement to have our targets. As you
can see, this gives us a pretty nice risk to reward ratio on a high probability setup.
Remember that when trading these breakouts, we are just trying to profit from the
momentum of the move. When these breakouts happen, the price tends to move faster in
one direction, so you have to be fast also to enter your trades and to exit them with your
calculated targets. Remember that once you plan your trade and you enter the trade, you
should stick to your plan and trade your plan.
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analysis on a double top. As you can see here, we are in a steep up trend, and we just
made a new high and tested this area of resistance. This candlestick, which is a dodgy
candlestick, gives us a signal that this area might be rejected, so we wait. As you can
see, this area was rejected but then we made this low right here, and after seeing this, we
can assume that price is going to retest this area and maybe break with this high, so we
need to wait. As you can see here, price tested this area again nicely and we have
another dodgy candlestick formed at resistance, so we might think that this area of
resistance was rejected twice which would give us a double top for us to go short on the
asset. Some people might be too aggressive or some traders might be too aggressive and
just short here at this level but if you want a really high probability setup, you need to
wait for the neckline to break.

Now you can see here that we have a double top. We tested this area of resistance twice
and we have the neckline at this low right here. The first thing we’re going to do is
we’re going to calculate our targets, right? Our targets are calculated from this high to
this low, or from the resistance area to the neckline. Remember that in a double bottom,
you calculate your targets from the support area to the neckline. In this case, we are in a
double top and we’re going to calculate it from the resistance area to the neckline, and
here we have a 60-pip range. What we do is we go to the neckline and we extrapolate
the 60 pips to the downside to get our targets. Okay? Now we wait for price action.
Boom.

As you can see here, when we break with the neckline, we have an entry to go short and
to profit 60 pips from the breakout of this reversal patterns. This reversal patterns occur
very often and if you’re monitoring more than one asset or financial instrument, you
might get at least 3 or 4 of these breakouts per day if you are day-trading the 50-minute
charts to the 1-hour charts. If you are focusing your strategy solely on chart patterns
breakouts, I can say that if you have discipline to wait for the breakout and to get out at
the calculated target, you will be trading a very profit-bearable strategy.