DailyFX.com -

Talking Points:

  • The Double-Top and Double-Bottom formation show multiple tests of support (or resistance) at a particular price level.
  • Traders can look to trade subsequent tests of these price levels.

Price action is the study of past price movements in an effort to trade the future. While this definition could be applied to the entirety of technical analysis, it has a special meaning with the topic of price action because price action investigates price, and price alone.

One of the most important elements of price action analysis is support and resistance, because if we can notice a specific price at which buyers or sellers have entered a market in the past, we might be able to use that in our favor in the future.

In this article, we’re going to examine a formation that can develop around these areas of support or resistance.

The Double-Top/Double-Bottom

The Double-Top or Double-Bottom formation will occur when two separate ‘moves’ bounce from a support or resistance level. This highlights that level as being especially strong, so that the next time price encounters this, traders may be able to look for a significant reaction.

In the below chart, we take a look at a recent double bottom formation in the AUDUSD pair.

Trading the Doubles

Created with Marketscope/Trading Station II; prepared by James Stanley

Notice how price action has reacted to this level of support two different occasions. So the next time that we approach this level of established support, it could be reasonable to assume that some type of reaction may take place.

Imagine this support level as a theoretical ‘line in the sand’ that can have the potential to pull additional buyers into the mix. But this isn’t necessarily a completely bullish prospect… because after this support level was defended, prices ended up coming right back down.

The exact opposite is true of resistance in the Double-Top formation…

Trading the Doubles

Created with Marketscope/Trading Station II; prepared by James Stanley

Notice how this level of resistance on the chart has been validated twice by price action, as sellers have come in to push prices lower once this level was hit.

Up to this point, we’ve covered everything that is known about the formation. Support (or resistance) has come into the market on separate occasions, and it may come in again: That’s all that we really know.

And this is just like any other congestion formation in the fact that all that we really know is that a reaction of some type may happen. But that’s ok – because with risk management, even that simple expectation can be enough to formulate a strategy.

How to Trade the Double Top/Bottom Formation

The default mannerism of trading the double bottom is to look for a bullish price reaction after the second test of support.

So, using the same AUDUSD example we had looked at previously, we look at how a trader could’ve approached this formation.

After support was hit for a second time, the trader knows that there could potentially be a bullish bias coming into the market. After all, if buyers jumped in to protect the ‘line-in-the-sand,’ they may do so again.

So after the double bottom was formed – the trader waits: The trader waits for a ‘higher-low’ to come into the market so that they can look to ‘buy low,’ with a stop placed below the level of support at the double-bottom. This way, if the formation doesn’t come to fruition, the loss can be mitigated; but if the formation does come through, then the trader can look to reap more upside than they had to put in to risk.

We taught traders how to look for ‘higher highs’ and ‘higher lows’ in the introduction to price action, and we showed the power of trading candlestick wicks in the article, The Power of Wicks in the FX Market.

Trading the Double Bottom

Trading the Doubles

Created with Marketscope/Trading Station II; prepared by James Stanley

As you can see in the above setup, the real allure of trading the double top or double bottom is the potential to have a really strong support or resistance level to use for the basis of a position’s risk management.

The exact opposite is true for the double top formation; in which the trader can look to sell ‘lower highs,’ with a stop above resistance so that if that level holds, the trader can look to manage a profitable position… but if the high point of resistance doesn’t hold, the trader can look to exit the position while mitigating the loss.

Related Articles
  1. Investing News

    China’s Forex Reserves Dropped Significantly

    China’s forex​ reserves dropped by a record $93.9 billion at the end of August to $3.56 trillion because the Central Bank has been selling dollars to provide a cushion to the falling yuan​
  2. Forex

    The Pros and Cons of a Fully Convertible Rupee

    Amid the rising economic power of India, the talks of making the Indian currency fully convertible are gaining momentum. We look at the pros and cons.
  3. Forex Fundamentals

    Chinese Yuan an Unlikely Reserve Currency

    As the world's second largest economy, China's challenge to America’s dominance includes a push to make the yuan (RMB), the world’s reserve currency. Whether it can do that now is unclear.
  4. Economics

    How Currency Enforcement Helped Sink The Trans-Pacific Partnership (TTP)

    One particular barrier to trade that has received much attention of late and caused delays in negotiations of the TPP is exchange-rate manipulation, by which a country artificially devalues its ...
  5. Forex

    Top U.S Forex News Sites

    Breaking news moves forex markets. Here are the top U.S. sites for tracking forex news.
  6. Investing

    Financial News Comparison: Bloomberg Vs. Reuters

    Access to financial information has grown with the expansion of digital news. Bloomberg and Thomson Reuters lead the pack, claiming a majority of the business information market.
  7. Economics

    Who Benefits From South Korea's Lowered Interest Rates?

    South Korea is the latest country to cut interest rates in an attempt to stimulate economic growth.
  8. Forex Education

    The Top Uses For P2P Currency Exchange

    Peer-to-peer (P2P) currency exchange networks offer a viable and cheaper alternative for buying and selling currencies.
  9. Forex

    Steps To Open An Offshore Forex Account

    Here is a simple breakdown of how to open an offshore forex account for US-based users, including legal requirements.
  10. Entrepreneurship

    Top Forex Trading Apps

    A brief overview of the top apps that help forex traders with on time information, charts and more.

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center