Double Top and Double Bottom Patterns
Thirty First session of Forex Training
Welcome to Forex professional training in financial markets.
In this session Double Top and Double Bottom patterns will be studied.
Double Top Pattern
When two peaks on an uptrend are formed next to each other, a Double Top pattern can be drawn by placing two level lines on the highest peak in addition to the valley between two peaks.
The height of peaks can be equal or different, while their forming time may differ.
Neckline, known as a confirmation line, must be a level line that specifies the breakout point where an order can be placed by a trader.
The Valley between two peaks must NOT pass the 38.2% of Fibonacci pattern which should be drawn from the beginning point of the trend to peak of the first wave.
H is the distance between the peak of the most elevated wave and Neckline, which must be a vertical line.
TP price would be H pips away from the Breakout point while SL price is above the peak of the second wave.
Double Bottom Pattern
On a downward trend, a Double Bottom pattern is formed by two consecutive valleys with different or the same height and width.
Neckline or confirmation line is a level line on the peak point which indicates the breakout point.
If peak point passes the 38.2% level on the Fibonacci pattern, which is drawn on the start point of trend to the first valley, Double Bottom pattern will not be reliable.
H is the vertical distance between the bottom of the longest valley and Neckline.
TP price is H pip away from breakout point, while SL price is lower than the second valley.
Some useful examples will be studied on MT4.
One of the most important requisites of this pattern is that valley of Double bottom must not pass 38.2% level of Fibonacci pattern on the swing.
In this example, Fibonacci is drawn from the starting point of the trend to the peak of the longer wave.
Valley has passed the 38.2% level, thus Double Top pattern was not formed.
Another example for a Double Bottom pattern can be drawn, so Fibonacci is drawn from the beginning point of a swing to the valley of a longer wave.
Trader can draw the figure of the trend by Trendline and Neckline being placed on the peak point.
Peak point did not cross the 38.2% level, thus this Double Bottom pattern is reliable.
Another Fibonacci can be drawn vertically from valley of the longer wave to the Neckline to consider H and H/2 pips above the breakout point.
Trader can relocate it to decrease bustle on the chart. H is 202 pips, and trend has passed the TP price with some fluctuation.
Another example of Double Top, in which two peaks are formed successively.
Trader can draw Trendlines of this pattern and place a Fibonacci pattern to clarify if valley has passed 38.2% level.
As it is displayed, valley did not pass that certain level, thus this Double Top pattern is valid and the breakout point can be indicated by drawing the Neckline.
Fibonacci clarifies the TP price under breakout point with H/2 or H pips amount.
If Double Top pattern is formed on a certain timeframe, a trader can change timeframe to another format.
In this example, resistance levels show another confirmation for a Sell order.
Based on price action mode, a trader could place a Sell order sooner than breakout point was formed.
There are several declines after price had met the resistance level, on D1 timeframe.
On H4, a trader can check if there is another pattern, so the region can be marked, so a trader can find that area easily when timeframe is changed.
There is an Engulfing candle pattern on the second peak of Double Top pattern, thus a trader could place Sell order under the Engulfing candle to derive more profit, with SL price over the given candle.
When market price met the breakout point, a trader could achieve more than 90 pips profit.
SL would be around 70 pips, while TP would be 261 pips, thus reward to risk amount was around 4 times higher.
It would be more lucrative to identify the trend direction through various patterns, especially when a candle pattern has formed on a Double Top pattern.
That concludes this session, until next time and another session take care.