Introduction
The number of strategies you can implement when trading range from the sensible and smart to the outright risky. Regarding double tops and double bottoms in trading, some traders have made a lot of money. However, you need to understand the market and how to read it properly. No trade is guaranteed to make money and even with clear research and understanding your capital is at risk.
Firstly, we will ascertain exactly what a double top is and what a double bottom is. A double top and bottom would be mirror images of each other if you were to place the mirror down the chart centre. Today’s goal is to specify what they are and to ensure you have a decent knowledge of them as we advance. You can look for each key sign signalling an entry opportunity once you know what to look for.
What Is A Double Top Pattern?
A double top pattern may sound like a complicated term, but it is a fairly straightforward pattern to spot. A letter M in a chart indicates a price reversal that can form in any financial asset. You can have a double top stock pattern, a double top forex pattern or a double top cryptocurrency pattern. They all look the same on a chart. It would help if you looked for a pattern, as seen below. This is a key indicator that a pivotal entry point could be imminent. In particular, if you are looking to short the asset.
If you identify a pivotal entry point, you don’t have to sit staring at a chart for hours until it hits the intended price. You can set up automatic take profit and stop losses. This top-of-the-range software works across various trading exchanges and asset classes. So you don’t need to worry about it working for one trade and not another.
For example, if you noticed this pattern emerge in a EUR/USD graph and then shorted the Euro, you may have successfully timed the top and could be on course to make a serious return.
Essentially, the price has hit the ceiling on two occasions meaning that the price sits naturally at somewhere below that point. A correction will likely occur. This is also known as a “neckline” amongst traders.
These are usually the main indicators of a double top chart pattern. Identifying this pattern generally means that large investors are looking to take their final portion of profit before the reversal takes place. We will explain this type of trading in more detail later in the article.
What Is A Double Bottom Pattern?
Now we will explore what a double bottom pattern is. Again, much like a double top chart, it is characterized by a limit being hit on two separate occasions. The difference with a double bottom chart is that it works in the opposite way, so it is a W shape.
A double bottom essentially identifies the basement price for that asset and signifies a bounce is due. If it is correctly identified, the ideal entry point will become clear. From this point onwards, if this pattern is correctly identified, it will naturally return to a figure more suited to its natural price. You can see this pattern detailed in the chart below.
Trading A Double Top
The main aspect of double tops trading is that you can identify it correctly in the chart. We cannot stress the importance of this. Both of these types of trading require critical understanding to succeed. Therefore, you must know how to read a chart when it presents itself in this way.
When it comes to this pattern, you must remember that they indicate that the market will move negatively. Therefore if you identify it properly, for instance, a forex double top would be a good example.
The way to trade this would be to sell your asset until the correction has bottomed out, so you can buy back at a cheaper price. Or you could look to open a short position. However, opening a short position is a riskier move.
Ideally, it would be best if you only stepped foot into the position when the asset breaks away from its neckline or the natural support level of the double top forex chart. Double top traders are more experienced at spotting these patterns emerging, but if you continue to educate yourself, you will become better equipped to trade them yourself.
At least if you sell the top, you have some capital if you have incorrectly identified the double top. If you open a short position, you could lose out even more dramatically than if you do not execute the trade at the top of the price action. So there are plenty of things to consider before you look to involve yourself in this type of trade.
What Is A Double Top In Stocks
Much like a forex trade, you may find it slightly easier to trade it in a stock trade if you’re looking at double bottom patterns. With a double top pattern, forex might be trickier to read as you measure the two assets correlating with each other on a chart. However, with a stock chart double top, you are timing how a singular asset behaves in the market and acting accordingly.
For some people, this is an easier trade, as buying one asset and selling for two is simpler. As opposed to waiting for two currencies to counteract each other in a specific way that becomes an easier trade to enter. However, this may sound like an over-complication. If you identified a double top, regardless of the asset, a stock double top is no different. You would stand to make a decent profit through this correct research.
Double top pattern stocks may form off the basis of news in the media. For example, if information is released about a particular company. This includes in the press or their own press release. It is key to be able to keep an eye on the news. It gives you a rounded picture of which direction the markets might head.
By dissecting and overanalyzing the market, you can turn a keen eye into a detriment which ends up working against any effective trading strategy.
So What Is The Key?
Much like anything, patience and finding a balance is usually the key to operating within a happy medium. Trading is no different, despite how difficult and complex people sometimes like to make it sound.
Doubletop traders make a successful profession by knowing when a double top candlestick pattern will form. It is key to find the balance between keeping a close eye on the charts without them becoming obsessive. You do not want to turn your trading psychology’s positive and observant quality into a fundamental flaw.
What Is A Double Top In Cryptocurrency
It may be easier for you to trade as a beginner by starting with a singular asset compared to a currency that coincides with another. A forex trade has the potential to look like more of a moving target than just one stock or cryptocurrency. A chart double top in cryptocurrency will form the same M shape you see in a stock or forex trade.
However, one thing to be careful of in cryptocurrency is that it is a far more volatile market than forex or stocks. It doesn’t have the same type of regulations as those two markets. As they are more traditional markets, they have larger amounts of institutional investment and 24-hour volume, which is reflected in the strong liquidity in each. Essentially, there are a higher number of specific “bulls” that control the price of certain cryptocurrencies.
When they begin to buy or sell, it’s time to fasten your seatbelts; any chart analysis might not carry much weight. Some cryptocurrencies can half in price over the course of a day or two and then bounce back to above their initial price.
Of course, this is a double top pattern when you zoom out and look at the chart over the week. However, at the time, it can be very easy to get drawn into trading on emotions and look to protect your losses or maximize your profit.
How To Manage It Effectively
Once you set up take profit and stop losses, you do not have to enter the daily emotional rollercoaster that cryptocurrency trading can entail. It is considered a far more volatile and unpredictable affair than trading other types of asset classes.
When it comes to cryptocurrency, try to stay inside the top 5 or 10 most traded, measured by 24-hour volume. If your trade is not executed at your chosen price, this will usually be due to liquidity issues.
Another key point to remember when it comes to cryptocurrency is that the market is extremely volatile. Due to the huge market rises and falls, it could be harder to spot a double bottom/double top chart in times of major price movements, so you must be vigilant at all times.
How To Trade A Double Bottom
Double bottom trading can be a lucrative strategy, much like when it comes to trading double tops, the importance lies with being able to hone in on the W letter that forms on the chart and executing your trade accordingly. A double top and bottom display similar behaviour regarding market sentiment, as they usually signal the market is going to head in a specific direction. A forex double bottom would usually signal a strong buy-in opportunity. Buying the bottom and setting yourself a realistic selling point is crucial. This is the sort of simple basics that allow traders to flourish when they use this strategy.
These charts clearly differ from double top chart patterns. They have specific triggers that can indicate the price is about to recover. We specified this in the previous section with the double top. However, you can apply it to all types of trading. It is important to keep an eye on any news and speculation regarding your asset and act suitably.
If you successfully identify a double bottom, you can look to open a long position. You can also enter the market to sell at a specific point. You can automatically set up these buy and sell points using to remove emotions from trading.
So How Do I Trade Double Tops And Bottoms Chart Pattern As A Beginner?
This is a logical question. Once you have grasped this trading strategy, you can begin to look at the mechanisms that underpin it. The first place to start is by using digital technology to your advantage. This may sound like a soundbite and a relatively moot point. Especially given how the whole of modern society is glued to the internet.
However, once we dive further into the technology, it is clear to see why over an estimated 60% of large institutional investment banks and hedge funds use automated technology to execute their trades. However, some analysts put this figure much higher, in the 85-90% region. Thanks to the internet, this technology is readily available to beginner traders.
As generations passed, investment companies and banks had access to brokers who could execute trades quickly and efficiently. As the 21st Century exposed these companies and industries to new technology, much-advanced software became available in the trading sphere.
If you implement effective software, where you can buy and sell your asset automatically without constantly monitoring the market, this will help you. As a beginner, you must be able to remove things that can potentially trip you up early in your trading journey. Implementing software like this is something expert traders also do daily.
Another piece of software you can take advantage of is demo trading software. This will give you the chance to trade with money that isn’t your own capital. This benefit is that it allows you to erase any potential mistakes. Including any that might arise if you go into the market without prior practice. Give yourself prior knowledge of how the market behaves on a general day-to-day basis and educate yourself.
What Are The Downsides To When It Comes To A Double Top & Double Bottom
Much like any trading strategy, you must ensure that you have correctly identified the double top double bottom pattern. If you fail to judge it properly, you could end up in a disastrous situation. Especially if you have opened up a short position after wrongly identifying a double top.
Having the ability to analyze the market correctly is what separates profitable traders from not-so-good traders. You should also factor in additional external factors like any news that comes out, such as rising interest rates or any press releases the company make, particularly if your stock is an asset as opposed to a cryptocurrency or foreign currency.
However, central government announcements regarding budgets or fiscal stimulus will usually result in major movements in the strength of the native currency. Patience is arguably the most important attribute you can possess as a trader.
If you fail to time a double bottom correctly, the asset could continue to plummet. It’s pretty clear what would happen in that scenario. The chart can occasionally form a triple bottom as well. You may have to sit on your investment longer than anticipated. In the case of cryptocurrency markets, you can see wide ranges of market highs and lows. If you fail to time it correctly, you could find yourself sitting on your investment for much longer than anticipated.
In a worst-case scenario, you could open a short position on an asset and the price reverses and begins to increase dramatically. In this instance, you would not only lose your initial investment. You may also lose more money on top of your investment due to the nature of the trade. This is why it is pivotal that you understand how the market behaves and how double chart patterns form. This is so you can prepare yourself for each trade in the most proactive way possible.
