You will learn how to spot a divergence a double bottom or top chart pattern, and how to place your positions accordingly
The double top and double bottom are reversal chart patterns. The double top is a bearish reversal pattern that occurs after an uptrend. Conversely, the double bottom is a bullish reversal pattern that occurs after a downtrend in the market. Let's tackle the double bottom.
As a chart reversal pattern, the double bottom needs a prior established downtrend. This is followed by two lows of approximately the same depth. The lows should be separated by a mild rally that makes an important swing high. The chart formation is complete when price breaks above the highest point between the two lows. The double bottom looks like the letter ''W'' from the English alphabet with the double top looking like the letter "M".
The chart above shows a
double bottom on the U.S Crude oil (WTI) daily chart. After downtrend prices
stall at 50.70. This is followed by a sizable correction higher during which a
high of 54.90 is reached. Then prices selloff again, nearly hitting the
previous low but falling short by 3 pips. The double bottom is complete when
price breaks above the swing high at 54.90 connecting the two lows
Trade Idea Entry, Stop loss and Target
The entry is at the break of resistance, in our example breaking above 54.90. A more conservative approach would be to wait for a close above 54.90. In this scenario it is the close of the daily candle.
We place our stop loss
order just below the lowest low of the formation at 50.70. To calculate the
target, we take the distance from the lowest point to the highest high and add
it to the break. This gives us a take profit of 59.20.
As we can see on the
chart below, the target level was reached.
This chart formation can also be at the top of a trend and known as "Double Top"
Treble Top or Bottom
We may also see ‘three’ rejections of a support or resistance area. This is known as a treble bottom or top and it sometimes analyzed as a Head and Shoulders formation