Double
tops and double bottoms appear
frequently in nearly every market and
time frame and are great indicators of a
potential trend reversal. I like this
type of patterns as it offers a logical
entry and exit point and often reaches
the price objective quickly. As the name
implies this pattern consists of two
peaks of roughly equal height for the
double top formation and two troughs of
roughly equal depth for the double
bottom formation.
Double
tops are sometimes called ''M's'' and
double bottoms ''W's'', as the pattern
resembles each of these letters. Both
are reversal patterns and the stronger
the preceding trend the more important
the reversal when it happens. My
research indicated that double tops tend
to be shorter in duration and the break
down more pronounced. Double bottoms on
the other hand tend to be longer in
duration and the price action tends to
be in a smaller range.
In the
first example of a double top (see
chart) a trend preceded the formation.
The trend met resistance at point A and
then declined to point B. From point B a
new attempt at the resistance line was
made and failed, this is the set up. The
next and most important part of the
pattern is that it breaks the neckline
and closes below the neckline.
It is
important that the neckline is broken on
a closing basis as up until this point
the market might merely be in
consolidation. Once the neckline is
broken you now have two choices. You can
enter the market straight away or wait
to see if the market returns to the
neckline and test the newly formed
resistance. I like to enter the market
on a break and add to my position if the
market does return to the neckline.
So now we
have a break in the neckline and enter
the market. Depending on the distance
between B and C you can either place
your stop loss order somewhere between B
and C or above C if its not to
expensive.
