Double tops and double bottoms are some of the most popular chart patterns for traders. Therefore, they tend to be those you learn first when it comes to trading chart patterns when trading cryptocurrencies.
Due to how commonplace they are - and how profitable it can be to know them - I’ve prepared this guide so you can know exactly how to proceed when you encounter one!
So, read on and learn how to trade double tops and double bottoms!
Let’s take a look at this graph for a moment:
Do you see the double top pattern? I'm sure you do!
Just in case, here I’ve marked it on the chart below.
This is a double top. It can be defined as two price spikes towards the same direction with a counter-trend movement in the middle. Following this same explanation, only reversed, double bottoms are also possible (and very common).
In addition, they usually share a common “foundation” (support/resistance zone) as you can see there around the 0.5 price level in the chart above.
They are one of the most recurring chart patterns - as I already told you - and probably the easiest to trade, by far.
The reason for their importance when trading is that they are a great signal of an upcoming trend reversal, as they usually mean that the market is trying to keep the trend after a loss in momentum.
As you can see in the previous graph.
There’s a massive drop right after the double top is formed.
The best part about this pattern is that it remains true for almost 90% of the times it shows up. And then it's up to us to take advantage of this pattern and trade it profitably.
The reason for double tops and bottoms is that any trend will lose momentum as time passes, and traders often try to reverse this for many reasons.
The result is a brief recovery of the trend, just for them to realize that they cannot fight it and fall once again.
Now, let’s see how you could have traded that double top!
I personally divide my trading strategy of double tops and bottoms into two versions:
Aggressive way - open a trade as soon as the double top or double bottom can be seen on the chart, and right after the first candle closes in the direction of the pattern. In the chart above, this would be right after the Doji candle closed in the second swing and the double top was formed. This is much more aggressive and can lead us to more false signals, but it allows us to place much smaller Stop-Loss and also provide a much bigger potential for profits.
- Conservative way - wait for the breakout of the "baseline" - the support/resistance price level that I highlighted in the chart above. The red candle is what confirms that this double top is bound to fall, as it shows an increase in downward momentum that breaks the blue support price level.
Therefore, in the case of the conservative way, I proceed to place my order there:
As you can see, I placed my SELL order right after the red bearish candle closed below the blue support price level, as it confirmed my assumption.
I always place my Stop-Loss above or below the price level of the whole double top or double bottom formation. It's also possible to place the Stop-Loss above or below the entry candle, but I would recommend considering this only in case of higher time-frames (as in case of intraday time-frames the Stop-Loss could be too low compared to market volatility).
Finally, my Take Profit in this trade was simply placed at the next round number (0.40000), setting me up for a nice 0.08500 gain in case of the conservative way! There was only one nice support/resistance zone just under the 0.40000 round number level. So this confluence of the 2 levels was indicating that this is the right place to exit the trade.
Now, let’s see how I actually traded this ETH position:
Here, I saw the losing momentum of the bearish trend and the double bottom chart formation. Based on this I opened my BUY position as soon as I saw the green candle form. I placed my Stop-Loss below the double bottom formation, as standard, and my Take Profit was placed below the first nearest resistance.
Again, this trade earned me a nice profit thanks to the safety of double bottoms.
As you can see, I take also a little negative Risk-Reward-Ratio trades - as if these formations are traded correctly, you will achieve a huge % success rate and very nice and stable profits in the long-term. This trade was a great example that you should always take what the market offers. As you can see, if I would place my Take-Profit 3x the value of my Stop-Loss, this trade and many more would end in a loss. But I rather set a little smaller Take-Profit based on what the market offered - I always take a high probability trades, this is my key to success.
What to say in the end regarding double tops and bottoms - learn it, trade it, master it and you will be able to achieve great results even only with this one pattern.
Take care and trade well!