One of the most commonly appearing chart patterns in binary options trading is the double bottom or double top. As this is such a frequently appearing pattern, it seems to indicate that price action is in fact not as random as is often supposed. As a price chart simply expresses trader sentiment, double bottoms and tops represent the retesting of a temporary extreme, with participants making a stand at the clearly demarcated levels.
The double top pattern will be formed when an asset’s price tries to rally, but fails to break the previous resistance level. Conversely, the double bottom pattern will be formed if a price drops, yet fails to break the previous support level.
Both the double top and the double bottom pattern are incredibly reliable patterns on an analytical chart and are able to be traded in isolation. Nevertheless, it is important to remember that nothing is ever certain in binary options trading, and therefore there will sometimes be occasions when the double bottom or double top pattern will fail to produce the expected results. Still, these two patterns are generally reliable enough to ensure that a trader that uses this trading approach will be taking a low risk yet high reward action.
How to Identify the Double Top Pattern
The double top pattern is a bearish one, always occurring following an uptrend. Therefore, once you have spotted a double top pattern occurring in your chart, you should then begin to look for selling opportunities. You will be able to identify a double top pattern easily as you will be able to see two highs where the asset price has attempted a breakthrough of the resistance level on two occasions before finally reversing on the downside. You will also see a neckline, the bottom of the pattern. You should ensure that the asset’s price has broken the pattern’s neckline in order to identify it as a true double top pattern.
How to Trade the Double Top Pattern
A trader can trade the double top pattern by entering the market and executing a sell order when the asset price has broken the neckline. A stop loss should be placed above the double top and should the price trade beyond that point, the double top pattern can be considered to have failed, and therefore you should not stay in the market. You can measure the profit target by extending the height of the pattern down from its neckline. There is another way to trade this pattern, and that is to wait until the price has broken support and gone below the neckline before placing a sell order. The top loss would be placed above the new area of resistance with the profit target staying the same as that in the first way of trading this pattern.
How to Identify a Double Bottom Pattern
When two lows form on a chart, this is called a double bottom and it indicates a reversal of the downward trend in an asset’s price, showing an uptrend is on the way. The trader will be able to see two distinct lows at roughly the same price level. The price will fall to a support level and then pull back up, falling back down to the support level once more before increasing. You can consider the pattern to be completed once the prices have risen above the highest high of the formation.
How to Trade the Double Bottom Pattern
There are two ways to trade the double bottom pattern. The first is to wait until the asset’s price has broken through the pattern’s neckline and then to enter a long position. The stop loss should be placed just below the double bottom pattern’s lows, and you can measure the profit target by extending the height of the pattern the same distance upwards from the neckline. The other way to trade this pattern is to hold off until the asset’s price has broken resistance and then execute a buy order. You would then place the stop loss below the new area of support, with the profit target remaining identical to that in the first way of trading this pattern.
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- Friesen, G. C., Weller, P. A., & Dunham, L. M. (2009). Price trends and patterns in technical analysis: A theoretical and empirical examination. Journal of Banking & Finance, 33(6), 1089-1100.