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Double Top & Double Bottom Strategy

Strategy Description

The double maximum formation (or pattern) is considered to be one of the most widespread reversal patterns on the market. It appears when a trend meets a strong resistance level, making two successive maximums at about the same level. In theory, the trend has ‘changed’ after the currency’s rate has passed the minimum level between these two maxima.

Note that the Double Top model resembles the letter “M”. As the result of an ascending trend, prices first reach the new maximum (point A) and this normally means that the volume of trade increases. Prices then retrace from the maximum and reach the support level (point B) at which point the volume continues to decrease. Another price boost will reach a point very close to the previous maximum so that it is at approximately the same level. One way or another, there is no considerable breakout (point C).

If prices once again reached the level of the previous minimum (point B) and were to break out at this level, the model is then realized and the trend is broken.The model’s prediction probability increases if the breakout occurs on increasing volumes. Before that moment all movements should be assumed to be a period of intermediate consolidation. It would be premature to assume the reverse of a trend before it actually happened. It may be just a horizontal phase of consolidation after which the previous trend would continue developing once again. Where there is an ideal combination of circumstances both maximums of the Double Top model should be situated on the same level.

It often happens that after breakout and a short downward movement the process comes back to the breakout support line and pushes off from it, but this time from below.It would then be expected that a fully-fledged descending trend and strong correction would develop. In order to determine market targets (where it will move to after breakout of the key support level) it is necessary to measure the distance between the central minimum and the support line. This same distance should then be measured off from below the breakout point.

This is considered the way to determine the optimistic target. The pessimistic target is determined a bit differently. The resistance line is drawn on two tops and the second line, parallel to the first one, is drawn through the minimum. The distance between these lines is measured off to the breakout point, the level of the intermediate minimum, as shown on the picture below.

The created level gives us the “pessimistic” target of price movement. The double bottom model, which is sometimes called the double foundation model, looks like a “W” and is a mirror-image of the double top model. All the rules for trading and analysis are exactly the same but mirrored.

Measurement methods for the double bottom models are absolutely identical. The only difference is that the height of the model (corridor width) is measured off in the opposite direction.

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