Double tops and double bottoms are very misunderstood technical patterns. Traded correctly however, they are extremely reliable trade signals. They become exponentially more reliable as you move up in timeframe on your charts. For example, a double bottom found on a four hour chart is much more reliable and predictable than a double bottom found on a 30 minute chart. A double top on a daily chart is also more reliable and predictable and a double top found on a one hour chart. This reality can lead the short-term trader to abandon these patterns. The truth is, that the longer-term pattern can provide several faster-moving in and out, short-term trading opportunities.
The issue most traders have with these patterns is they do not know how to properly identify them. Double tops and bottoms do not just consist of 2 swing highs or two swing lows. The issue is with the name of the pattern. The name makes people think the pattern is a simple set of 2 highs or 2 lows, but there is a very specific set of circumstances that make up a high probability double. Once a trader knows these circumstances, they can they can identify these patterns and enter in the direction of the long-term target multiple times at multiple different import at levels within the pattern. The attached chart is a daily gold chart and you can see 3 short-term longs that were entered all in the direction of the initial long that the pattern calls for.
The 6 levels on the chart marked by horizontal lines are all specific measured levels dictated by the circumstances that assigned the name “Double-bottom” to the pattern. They are not guesses; they are concrete price levels that all serve a function in the longer term pattern.
Multi-timeframe analysis is critical to high-probability trading and understanding what makes a pattern high probability is the responsibility of the trader. Trade proven, reliable methods, then adjust WITHIN THE RULES of the method, and your trading will have found a solid Path.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results