Double top and bottom patterns in trading

A double top is a candlestick pattern that forms when the price on a candlestick chart​​​​ makes a high, pulls back forming a swing low and then moves back to near the prior high. The pattern is complete, indicating a bearish reversal when the price drops below the swing low formed between the two peaks.

Candlestick charts are commonly used because they show the high and low for each price bar or candle. Until the price falls below the swing low between the peaks, the double top pattern is still forming and this does not necessarily indicate a trend reversal. The price could still move above the highs. Below is an example of a double top on a Brent Crude oil price chart.

A double bottom candlestick pattern is a chart pattern that occurs when the price makes a low, pulls back to the upside forming a swing high, then moves back down to near the prior low. For the pattern to complete and signal a possible price reversal to the upside, the price must move above the high swing that occurred between the two lows.

The lows do not need to be the exact same level. The lows will typically occur at slightly different levels, which is the same for a double top. Here is an example of a double bottom on a Bitcoin (USD) trading chart​​.

Double tops and bottoms can provide useful information for trading, which is why we offer a chart pattern screener on our trading platform, Next Generation. This technical tool is an automated computer program that scans trading charts for patterns.

Traders can manually look through forex pairs, stocks, indices or commodities for double top or bottom patterns, or you can simply use pattern recognition software. Our chart pattern scanner can also be used for other patterns such as head and shoulders, triangles, and cup and handles. To test our chart pattern scanner on the platform, you will need to create an account. By opening a demo account, this allows you to trade risk-free in the markets using our pattern recognition software. Automated software can be used to highlight patterns that traders are unable to spot.

Double top and bottom patterns can be traded in multiple ways. When a double top pattern occurs, it may alert the trader of a trend reversal, and when a double bottom pattern occurs, this may alert the trader that a bullish trend is underway. They may then begin looking for short or long positions, depending on their overall trading strategy.

For a double top pattern, some traders may place a stop-loss order​​​​ above the second high, which is a resistance point. Others may place it above a more recent swing high or use a trailing stop-loss.

As for a profit target, some traders may use the height of the pattern, from the high to the swing low, and subtract this from the breakout point. For example, if the highs are near $72 and the low is $58, the pattern height is $14. Subtracted from the $58 breakout point (swing low), the target is $44. This is one example of a possible exit strategy.

Once a double bottom has completed and the price has moved higher above the breakout point, the price will sometimes pull back to near the breakout point. Being aware of this possibility is useful for at least two reasons:

There are a number of ways to combine price action patterns with indicators. Although double tops and bottoms can be traded on their own through analysing the price action​​​ of the pattern itself, they can also be used with technical indicators​​​​ in order to provide additional confirmation and strategy.

For example, a stochastic oscillator​​ that crosses its signal line could provide an early entry point into a double bottom or top trade, as could the relative strength index (RSI) moving up above a selected level from below.

On the USD/CAD price chart below, the price has not completed the double bottom yet, but the stochastic has made an upward crossover and the RSI has moved up above 30 from below. These trade signals occur before the price action signals, when the price moves above a swing high. This provides a different perspective on how these patterns could be traded.

Double tops and bottoms work the same way in forex trading​​ as they do in other markets. One consideration to take into account is that forex market is open 24 hours a day during the week; however, in many currency pairs, the most price action and volatility occurs during the London and New York sessions.

If trading currency pairs when major global cities are not open for business, the price tends to be choppier. Choppy sideways movement can create the appearance of multiple double tops and bottoms, yet without traders to push the price, breakouts are more prone to failure until the major regions open for business and more traders enter the market. This concept is only applicable when trading on timeframes below the daily.

Double tops and bottoms can be used to trade shares​​ and stock indices. Aspects of fundamental analysis​​​​​ can have a dramatic effect on the share price, which may overshadow the double top or bottom pattern. This includes earnings reports and changes to company structure. For example, a double bottom may form on a price chart, making a stock look enticing to trade. If a poor earnings report comes out, the price may plummet, despite the double bottom pattern. Therefore, you should take special care when trading around these events.

Triple top and triple bottom patterns form slightly differently to double tops and bottoms. The topping pattern has three peaks at similar price levels with two pullbacks in between, whereas the bottoming pattern has three bottoms at similar price levels with two rallies in between. These patterns complete when the price moves below the pullback lows (topping) or above the rally highs (bottoming).

Triple tops and bottoms are can be traded in a similar way to double tops and double bottoms, and they aim to provide the same information to the trader. Mainly, they signal a change in trend direction.

Both double top and bottom patterns can be used in trading to provide entry points, as well as stop-loss and profit target locations. The stop-loss helps to control the risk on the trade. Patterns can be manually searched for or scanned with automated software on our trading platform​​.