Double and Triple Tops Explained

 

Hello there, this is tradingpedia.com and this video deals with double and triple tops and bottoms, very powerful reversal patterns seen on any timeframe and any market, regardless if it is the stock market or the FX market.

These classic technical analysis patterns are used by traders all over the world and often the market hesitates at such levels. Therefore, a double top or a double bottom form at the end of a rising or falling trend, and look like the letters M or W.

Double Top & Double Bottom

For instance, for a double top, you need a rising market, and the price is rejected from a horizontal area. Careful here, because a horizontal area in the currency market is difficult to interpret because the volatility is high and you must look at an area where the market tries two times to break it and it fails both times and that will be your market top.

So the market tries, gets rejected, tries again, and gets rejected again, and this is the letter M, the double top. The double bottom, obviously, is the opposite. The market tries at the end of a bearish trend, it bounces a bit, tries again, and then bounces. This is a W. As you can see, the distance between these two attempts is smaller than the distance between these two attempts, telling you that there is a diversity within the two patterns.

The measured move of such a pattern is the distance from the horizontal base until the pullback in the middle, projected from that place higher or lower. This is the minimum distance that the market should travel. It is not mandatory for the market to reverse after reaching these measured moves, but it is mandatory for the market to reach these measured moves. By the time, a double top or bottom is in place, you will often notice that it remains in place for quite some time.

Summary

We have a couple of examples here on the monthly GBPUSD chart. We had a bounce during the financial crisis and the market bounced and hesitated at this area, forming two highs. How do we place the measured move for the double top? It is not necessarily the measured move that you see in the trading books, but it is the distance that the market traveled here, projected to the downside. I would say that a proper measured move in this case would be this one, projected from the moment that the market broke lower and that will confirm the double top in this area.

Then the market fell aggressively – this was as a result of the Brexit referendum in 2016, it bounced, this was the coronavirus pandemic dip, it bounced, but it bounced from a similar area, raising questions that the market actually formed a double bottom.

Calculateing the Measured Move

How do we calculate the measured move? Well, we take trendline and measure this distance and project it from here and that would be the minimum distance that the market should travel to confirm the double bottom.

Obviously, for any trade you will need a stop loss, an entry, and a take profit. Trading a double bottom on the bigger timeframes is very difficult because you cannot go on the long side here at 1.31 and place a stop loss at 1.14 and targeting much higher. The distance is too big to justify such a trade.

But on a bigger timeframe they are useful to reflect the length and the strength of a trend. For instance here, if we do not trade the double bottom on this timeframe by the time that the double top is confirmed, we can go on the lower timeframes and trade on the short side because a toppish formation is in place.

So even if we don’t trade this move to the upside and the price manages to confirm the pattern, we can trade the bullish trend by following the rules of a bullish trend.

Triple Top or Triple Bottom

The market may also put a triple top or triple bottom – still against a horizontal line. It is a similar concept with the exception that the market tries for the third time at the same area before reversing. What is important to mention here is that between the double tops and bottoms and triple tops and bottoms, the first ones are more common. Therefore, look for double tops and bottoms to be responsible for stronger market moves than triple tops and bottoms.

Sum Up

I will end up with the fact that the triple tops and bottoms rarely hold. When you see a triple top, even if confirmed, the market usually comes back and makes a new high. Therefore, triple tops and bottoms should be treated with a grain of salt, while double tops and bottoms should be viewed as more important.

Thank you for being here. Bye bye.