How to Trade Double Tops and Double Bottoms


FX SIGNALS – When a double top or double bottom chart pattern appears, a trend reversal has begun.

Let’s learn how to identify these chart patterns and trade them.

Double Top
A double top is a reversal pattern that is formed after there is an extended move up.

The “tops” are peaks that 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.

Notice how the second top was not able to break the high of the first top.

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.

How to Trade Double Tops and Double Bottoms

Wow! We must be psychic or something because we always seem to be right!

Looking at the chart you can see that the price breaks the neckline and makes a nice move down.

Remember that double tops are a trend reversal formation so you’ll want to look for these after there is a strong uptrend.

You’ll also notice that the drop is approximately the same height as the double top formation.

Keep that in mind because that’ll be useful in setting profit targets.

Double Bottom

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

These formations occur after extended downtrends when two valleys or “bottoms” have been formed.

Notice how the second bottom wasn’t able to significantly break the first bottom.

This is a sign that the selling pressure is about finished, and that a reversal is about to occur.

How to Trade the Head and Shoulders Pattern

The head and shoulders chart pattern is a reversal pattern and most often seen in uptrends.

Not only is “head and shoulders” known for trend reversals, but it’s also known for dandruff reversals as well. 😂

In this lesson, we’ll stick to talking about trend reversals and leave the topic of dandruff for another time.

Head and Shoulders

A head and shoulders pattern is also a trend reversal formation.

It is formed by a peak (shoulder), followed by a higher peak (head), and then another lower peak (shoulder).

A “neckline” is drawn by connecting the lowest points of the two troughs.
The slope of this line can either be up or down. Typically, when the slope is down, it produces a more reliable signal.

In this example, we can easily see the head and shoulders pattern.

Trading the Trend Lines Guide

The head is the second peak and is the highest point in the pattern. The two shoulders also form peaks but do not exceed the height of the head.
With this formation, we put an entry order below the neckline.

We can also calculate a target by measuring the high point of the head to the neckline.

Trading Guides: Identifying Chart Patterns in Forex Trading

You can see that once the price goes below the neckline it makes a move that is at least the size of the distance between the head and the neckline.

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We know you’re thinking to yourself, “the price kept moving even after it reached the target.”

Day Trading

Inverse Head and Shoulders
The name speaks for itself. It is basically a head and shoulders formation, except this time it’s upside down. 🙃

Measure the distance between the head and the neckline, and that is approximately the distance that the price will move after it breaks the neckline.

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