Of all the technical analysis formations, the double top pattern and its close cousins are among the most reliable chart patterns. A pattern I will discuss today resembles a Head and Shoulders pattern. You can read about the latter in the article about H&S. A Double and Triple Top or Bottom pattern is subject to the same principle that is, you get a confirmation of the pattern the moment the price breaks out of the neckline. The difference between these two patterns is that the tops and bottoms have almost the same height in the double and triple top/bottom pattern and the height of the head and shoulders varies considerably.
When you know how to recognise the head and shoulders pattern, it will be quite easy for you to identify the double and triple top/bottom pattern. And this way the hardest part of the job is done. The only thing left is to trade accordingly. There is, however, an important note to be made. The rate of success for this particular pattern is slightly lower than for the head and shoulders pattern.
- 1 What is a double top pattern?
- 2 Identifying the double bottom pattern
- 3 How to identify the triple top pattern
- 4 How to identify the triple bottom pattern
- 5 How to set up an option for price decrease with the double top pattern
- 6 Opening an option for price increase using the double bottom pattern
- 7 Opening a down option with the triple top pattern
- 8 How to enter an up option with the triple bottom pattern
- 9 How reliable is the double top pattern?
What is a double top pattern?
You can only identify a double top pattern on the top of the uptrend. It has two approximately equal peaks. By joining the lows of the first and the second peak, you will get a line of the neck. The moment price breaks this line, the pattern is confirmed.
This is a bearish reversal pattern used by many IQ Option traders. Moreover, a fall in the price will be rough. To predict how low the price will drop you have to measure the height of the highest peak and subtract it from the level of the neckline.
Here are a few guidelines on how to identify the double top pattern:
- Both tops are of a similar height. The highest point will be within a 0% to 4% range from the first peak (depending on the timeframe).
- There is a sudden decrease in the price after it breaks the support level of the neckline (this level is a price level of a bottom located between tops).
- The formation establishes during a longer time, but of course, you can find it on any timeframe.
This is a bullish reversal pattern that is formed at the bottom of the downtrend. When it is finished, the reverse of the price occurs abruptly.
The shape of the double bottom pattern reminds of the letter ‘W'. It consists of two almost equal height bottoms and a peak between them. Once the reaction highs are connected, you get a neckline of the pattern. The pattern is confirmed when the price breaks out of the neckline.
Rules to be followed when identifying the double bottom pattern:
- Both bottoms are of a similar height. The lowest point of the second bottom will be within the 0% to 4% range from the first bottom.
- There is a sudden increase in the price when the neckline (the resistance level) is broken.
- The time when the pattern is created shall be long.
How to identify the triple top pattern
Like the double top pattern, this formation belongs to the bearish reversal patterns. It develops at the end of the uptrend. The time of its creation is longer than of the double top pattern, thus it is more reliable.
It consists of three subsequent peaks. The distance between them is rarely the same. The neckline is drawn by joining the lows of the formation. Once this support level is broken, the pattern is confirmed and the trend reverses.
A few rules to follow in identifying the triple top pattern:
- The height of all three tops is similar.
- There is a sharp increase in volume when the neckline is broken.
This is a bullish reversal pattern that is more reliable than the double bottom pattern because the support is tested three times and not only two. However, this one is less common.
The triple bottom pattern develops at the end of the downtrend. There are three consecutive bottoms. The space between them may be the same but may be different as well. More important is that the moment the price breaks the neckline (which is drawn by connecting all the tops of the pattern), the uptrend begins.
In order for the triple bottom pattern to be completed, the following rules must be fulfilled:
- All three bottoms are of similar height and the turning points are clearly distinguished.
- There is a violent increase in volume when the price breaks the neckline.
How to set up an option for price decrease with the double top pattern
A double top pattern can extend to a triple top pattern. That is the reason why it is recommended to act carefully. Especially if you have just started your trading adventure. On the other hand, when the neckline is broken, there is an increase in volume and momentum, and when all the previously pointed conditions are fulfilled, an option for price decrease can be obtained with pretty good chances of success.
It is recommended to open a down option for at least 5 minutes if your chart is set for 1-minute interval candles. When you trade on the chart with 5-minute period candles, you should open an option for a duration of 15 minutes.
Remember that news may influence the market and change the situation. Read the news calendar and stay alert.
It takes some time for a double bottom pattern to form. Patience is crucial in trading. Once the pattern is formed and you recognised it, the only thing left is to wait for the price to break through the neckline. This is your entry point. The moment the first candle is closed above the line.
Normally, the price will rise rapidly at the height that is equal to a height of the lowest bottom. When you trade with the 1-minute chart, open an up option for a duration of 5 minutes. If you prefer the 5-minute interval candles chart, keep your trade open for at least 15 minutes.
Opening a down option with the triple top pattern
Again, patience is required when trading with this pattern. You must carefully observe the tops that appear on the chart. When you do not notice an increase in volume after the second top, you may anticipate the third will rise.
When the price breaks the neckline after the third top is formed, the pattern is confirmed. A drop in the price will be sharp, so there is no time to waste now. You should open a down option the moment the first candle closes below the neckline.
The concept is very much similar to the one from trading using the triple top pattern, just inverted. This is a bullish reversal pattern so you should open an up option as the price will rise after crossing the resistance line.
Your main task is to identify the pattern. I believe it would be much easier with the guidelines in this article. Once you have got the pattern confirmation, you enter the trade. Remember, having patience is the most important skill you must develop.
How reliable is the double top pattern?
In fact, we have met the whole double top pattern family today. These are classic formations known in technical analysis. There are strong psychological reasons behind them, announcing a trend reversal. First, the pattern appears in a clear trend. The market, however, no longer has enough power to create new price extremes and stops where it did before. Crossing the neckline is evidence of market capitulation.
Patterns of this type can be found on charts of various assets and on many intervals. They have quite a high predictive value. It is worth combining them with other tools. The first to come to mind are divergences, which can provide great confirmation of a change in trend.
What is your experience with double top patterns? Do you use it in your daily trading? Write about it in a comment under the article.
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