Post of the Day: Trading Double Tops/Bottoms

[B]Student’s Question:[/B]

I found this double bottom when looking at the GBP/USD Daily Chart. I found the first bottom at 1.4556 and then setup an entry point at 1.4576 for the second bottom. The stop was set 50 pips below the first bottom at 1.4505 and the limit was set using 1:2 ratio at 1.4676 (100 pips). It wasn’t until I finished drawing the lines that I noticed that this trade may have been stopped out because the second bottom dips to 1.4468.


[B]Power Course Instructor’s Response:[/B]

Yes…we would need to wait until both bottoms (or top) are in place so our stop placement can be accurate.

Keep in mind that we want double tops/bottoms to be relatively close in price level where both “touches” occur…the closer to the same level of support or resistance to two tops/bottoms are, the more valid the pattern will be. Also, keep in mind that we want to see a number of candles between the first top/bottom and the second top/bottom. Two candles right next to each other will not qualify as a valid pattern.

See the chart below for a visual…note how the price action (large black arrows) in this double top will form the capital letter “M”. For a double bottom we would be able to identify the capital letter “W”.