This is one of the most popular reversal patterns and like the name there suggests a double top is a reversal pattern that comes at the end of a bullish trend and double bottoms are reversal patterns at the end of bearish trends. They are so popular that sometimes they seem to appear all over the place as M or W shapes seem to be so common. For all the reasons listed below, they are not.
Double tops and bottoms are coming with a measured move and this measured move should be considered only after price is breaking the all-important trend line: the line that defines the M or the W shape these patterns are making. More details to be found out on the recordings above.
Reversal Pattern with a Measured Move
In other words, we’re looking at a reversal pattern with a measured move and in this way it resembles with the head and shoulders and inversed head and shoulders pattern as those are having a measured move as well and it should be quantified in the same way: taking a line from the highs/lows in the double top/bottom to the line that defines the M/W shape and project that line at the moment the trend line is broken and that is the minimum distance price should travel.
But Options When the Price is Breaking the Trendline
If we are trading binary options here we should look for buying put/call options only when price is breaking below/above that trend line otherwise the pattern is not confirmed and we risk being trapped in an unwanted territory. Same goes for CFDs traders.
The two videos with this educational material are looking at two different situations on the current USDJPY chart. Actually there is one more situation in the video that traders should take note of – if the trend line prior to the measured move is not broken, we should not consider that pattern.
Double tops and bottoms are somewhat similar with the triple tops and bottoms, with the exception that they are coming in a more simple way, having only two points that area considered to be part of the M respectively W shape.
However, in comparison with the triple tops/bottoms, the double ones are actually quite stronger in the sense that the so called top or bottom after a triple touch is rarely holding as it is more indicating that price is forming a triangle rather than a reversal pattern.
What Would Indicate a Double Bottom or Top?
According to the Elliott Waves Theory, such a pattern is most likely a flat pattern and this means it should have the b wave almost similar with wave a. In plain English, the b wave should retrace more than 80% of wave a and this is the detail that makes the whole flat to look like a double bottom or top. The c wave to follow such a pattern is an impulsive move or a five waves structure and these kind of impulsive moves are quite aggressive, hence creating the impression that the market is actually rejected from a double bottom/top.
In reality, it is only a pattern that may or may not reach the measured move like indicated at the beginning of this article as the measured move does not need to happen.
Flat – Pattern with a Wave C
If the flat pattern is a pattern with a wave c that is stretching way higher when compared with the length of wave a, then chances are we will see the measured move coming. If not, I would not try to go in the same direction as by the time the flat is completed market will either consolidate in that area or will reverse the other way around.
Such pattern must be accompanied by an indicator of some sort, ideally an oscillator. The way to go is to look for the oscillator and price to diverge at the moment the double top/bottom is forming as that is a signal market is looking to reverse.
Identifying the Divergence Pattern
Of course, the case of a double bottom BUY CFDs / CALL options are recommended, while a double top should always be followed by SELL /PUT options. The usual caveat applies here as well as the bigger the time frame, the bigger the expiration date needed and also the smaller the risk. However, if the pattern or divergence is identified on the lower time frames, like, say, the 5 min chart, then hourly expiration date for binary options might be traded as well. Such patterns appear in complex corrective waves when market simply needs more time to consolidate, if the corrective wave is a continuation pattern, and a clear understanding offers a great competitive advantage to any trader.