English | September 20, 2024 | ASIN: B0DHPV1G2F | 45 pages | EPUB | 0.56 Mb
Strategy 3: Double Tops and Bottoms
The Double Top and Double Bottom patterns are classic reversal patterns in Price Action trading. These patterns indicate that the existing trend is weakening, and a reversal may be imminent.
1. Double Top:- A Double Top occurs during an uptrend when the price reaches a high, pulls back, and then attempts to make a new high but fails to surpass the previous peak. This forms two peaks at roughly the same level, signaling that buying pressure is weakening and a bearish reversal is likely.
• How to Trade It:- Look for the price to break below the neckline, the horizontal support level between the two peaks. This confirms the reversal.
- Enter a short trade once the neckline is broken.
- Set a stop loss above the second top and aim for a target equal to the height between the tops and the neckline.
2. Double Bottom:- A Double Bottom forms during a downtrend when the price makes a low, bounces, and then attempts to make a new low but fails to break below the previous low. This forms two valleys at similar levels, indicating that selling pressure is diminishing and a bullish reversal is likely.
• How to Trade It:- Look for the price to break above the neckline, the horizontal resistance level between the two valleys. This confirms the reversal.
- Enter a long trade once the neckline is broken.
- Set a stop loss below the second bottom and aim for a target equal to the height between the bottoms and the neckline.
Example: In a Double Top, if the price reaches $50, pulls back to $45, and then rises to $50 again but fails to break higher, the neckline at $45 becomes crucial. If the price breaks below $45, it signals a potential downtrend, and traders can enter short positions.
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