In today’s day trading tutorial we will discuss one of our favorite price-reversal patterns we trade in our Live Trade Room every day with our members, the Double-Top & Bottom Pattern.
· The Double-Top pattern occurs when a new high-of-day (HOD) is made and then fails to make a new higher-high on the second attempt later in the session, creating 2 highs at ultimately the same price level.
· The Double-bottom pattern occurs when a new low-of-day (LOD) is made and then fails to make a lower-low on the second attempt later in the session, creating 2 lows at ultimately the same price level.
The Double-Top & Bottom Patterns are very reliable, and they occur on any market, any timeframe around the world.
Trading with the Double-Top & Bottom Pattern(s) are easy, and we use the following steps to find these patterns and profit from them.
Example: Trading with a Double-top pattern (SHORT)
Step 1: Find a new high-of-day (HOD)
The first step to finding the Double-top pattern is to find a new high-of-day (HOD) on your entry chart.
Make note of this price level because we will be waiting for a second attempt to make a new high-of-day (HOD) later in the session.
Step 2: Create the Double-top Pattern
The second step to finding the Double-top pattern is to find a re-test of the high-of-day (HOD) where we will look for the buyers to FAIL. This creates the look of the ‘double-top’ pattern.
It should take more than 5 candlesticks before we make this test of the high-of-day (HOD) and should not take any more than 20 candlesticks to create the double-top.
In addition, we must see the price actually test the high-of-day (HOD), close is not close enough, and it is acceptable if the price-action pushes to new highs, as long as the new high does not exceed the previous high-of-day (HOD) by more than 5-ticks.
Step 3: Define the ‘Neckline’ Of the Double-top Pattern:
The third step is to define the ‘neckline’ of the double-top pattern by finding the lowest point between the two tops, and that becomes your entry level on the SHORT trade.
Step 4: Entry is Triggered SHORT at the break of the ‘Neckline’
We enter short when a candlestick closes below the ‘neckline’ of the double-top pattern.
The most important aspect of this entry trigger is the close of the candle; it must close below the neckline to be a valid entry.
Step 5: Place your Stop-loss to Protect against losses:
We always use a protective stop-loss, and the stop-loss is placed 3-ticks above the highs of the double-top.
Remember, this stop-loss should never be risking more than 5% of your account on any single trade. Less is more, so risk less than 5% if possible.
Step 6: Place your profit-targets to lock in profits on the trade
We use specific profit-targets for each trade we take to ensure we lock-in profits at the correct time on the trade.
Profit-targets for the Double-top Pattern use the range from the double-top down to the ‘neckline’ as well as a major swing-low on the chart.
· Profit-target #1 is placed at the 100% extension of the double-top down to the ‘Neckline, which means the first target is the same distance as your stop-loss on the trade.
· Profit-target #2 is placed at the 200% extension of the double-top down to the ‘Neckline’ (or) at a major swing-low on the chart, whichever is closer to your entry price, which means the second target is at least twice the distance as your stop-loss on the trade, which is the proper risk-reward-ratio on the trade.
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