Double Tops and Bottoms

There are two different types of “double” chart patterns: double tops, and double bottoms. We’ll start first with double tops, which are a bearish reversal signal.

A double top is formed when the price of a currency pair makes two consecutive peaks at a certain price range. We can put a trend line at the top of the peaks to show resistance, and draw another line to mark what we’ll describe as “mild” support—meaning it really isn’t all that strong of support.

This mild support line is often known as a “neckline.” At this price, we expect the market provide some support, but we’re also looking for a breakout at any price below the neckline.

The chart below shows how we draw lines around a double top:

There are a few things we should look for in a double top:

1. Failed second break – In general, we want to see that the second peak in a double top fails to rise higher than the first top. This shows that the resistance is strong at this level.
2. Bounces off the neckline – The price at which we draw the neckline has to be a well-tested support line. We talked about how breakouts through a support line are bigger when the support line is stronger. Thus, if the support is stronger, we can make more pips on a break out to the bottom.
3. Long uptrend – A double top is only a double top if it comes after a long (and hopefully steep) uptrend to the top of a chart. A double top at a relative trough in the chart isn’t a double top.

When the price breaks through the neckline, we should expect the currency pair to move by the same amount of pips from the top to the neckline. In the demonstration chart above, the price actually moved by a greater amount than the distance from the neckline to the peak of the pattern.

The Double Bottom

A double bottom is a bullish signal that usually follows a long downtrend. Think of a double bottom as an inverted double top—just flip a double top over and you have a double bottom.

The double bottom still has two tops, a neckline, and is analyzed in much the same way. Here is an example of a double bottom pattern:

When scoping out a double bottom, we want to see:

1. Failed second break – In general, we want to see that the second dip in a double top fails to fall lower than the first bottom. This shows that the support is strong at this level.
2. Bounces off the neckline – The price at which we draw the neckline has to be a well-tested resistance line. We talked about how breakouts through a resistance line are bigger when the resistance line is stronger. Thus, if the resistance is stronger, we can make more pips on a break out to the bottom.
3. Long downtrend– A double top is only a double top if it comes after a long (and hopefully steep) uptrend to the top of a chart. A double top at a relative trough in the chart isn’t a double top.

Much like the double top, we can expect a reversal movement equal in size to the distance between the tips of the bottoms to the neckline. Thus, if the distance between the neckline and the bottoms is 40 pips, the movement above the neckline should be roughly 40 pips in a perfect double bottom.

The double bottom and top are mostly self-explanatory. We’ll move on to another chart pattern—pennants and flags—where we can use our trend line drawing skills to our advantage