Technical Analysis – Double and Triple Tops/Bottoms
A double or a triple top/bottom pattern is a reversal pattern. It means that the market is expected to decline (after a rising trend) or to rise (after a bearish trend) when these patterns are forming. The double and triple tops/bottoms are different in both the way they form and the way traders should interpret them. The fact that market is hesitating at a specific level is indicating a possible reversal to form. However, multiple tries at the same level is not a sing of a strong reversal pattern, but a sign of continuation. Most likely, a triangle is going to form and the previous trend will resume after the triangle completes. For more about this, please check the previous article on the Trading Academy. Ascending and descending triangles are the result of multiple testing of the same resistance or support area.
What Makes Double and Triple Tops
Between the two patterns, based on the logic explained above, a double top/bottom is a more powerful pattern than a triple one. Triple tops/bottoms have their reversal power, but they rarely survive.
A double top is having the M shape, while a double bottom, of course, is looking like the W letter. They stand for the market making two attempts at a specific level/area before a reversal takes place. Both double tops and bottoms are having a neckline and a measured move. The neckline is a line that can be drawn at the lows (in the case of a double top) or the highs (in the case of a double bottom) made after the first part of the double top/bottom. The measured move is the distance from the highest point of the double top or lowest point of the double bottom, projected from the neckline. But the measured move is only an indication that the pattern is in place, not a sign to close a trade after its confirmation. Because a double top/bottom falls into the category of reversal patterns, the completion of the measured move is only the start of the new trend. Depending on the time frame the pattern appears, the implications can be important.
The most famous double top that appeared on charts lately is the one the EURUSD made on the monthly chart. At the start of the 2008 financial crisis, the EURUSD put a toppish formation, a reversal pattern, on the monthly chart. The chart above shows where the double top formed, and it took the pattern five candles to complete. That is, five months.
A zoom into the pattern reveals the letter M taking place, and this is the clear sign that the reversal is happening. The next thing to look for is the measured move. If completed, the pattern is confirmed. A confirmation puts the double top in place and any retracement should be met with selling orders.
In this case, the double top was confirmed the moment the measured move was completed. As it can be seen on the monthly chart posted earlier here, the retracement that followed represented just another opportunity to sell the pair. Everything discussed in this double top example is valid for the double bottom, only that the letter or the shape is a W one, and the new trend is a bullish one. Again, double tops and bottoms are more powerful than triple ones.
A triple top/bottom formation resembles a triangular formation. This is the very first thing that should come to mind when seeing that price is trying three times to break a level and fails. When compared with the double top/bottom formation, a triple top rarely holds. Rarely doesn’t mean never though, and if it does hold, the reversal is meaningful. Contrarian traders are trying to fade a triple top/bottom formation on the assumption that it is most likely for it to fail than to succeed. This is a good strategy to some extent, but an even better one would be to wait for the pattern to be confirmed and only then to enter a trade. Confirmation, in this case, is similar with the one of a double top/bottom. The measured move should be projected from the trend line, and, upon completion, the pattern is believed to be in place. The AUDUSD pair formed a triple bottom at the end of 2016/starting of 2017 and the pattern was confirmed a few days later. Needless to say, the trend that started was an aggressive one, and conservative traders that waited for the pattern to be confirmed were rewarded handsomely.
A simple look at the pattern shows the fact that, during its formation, a triangle as a continuation pattern can be drawn. Such a triangle is a descending one, but again, future price action needs to confirm it. Aggressive traders that open contrarian trades, will look to fade the triple bottom and sell the move that follows the third bottom. However, if the measured move is traveled and the triple bottom confirmed, traders will close the short and reverse the trade, recovering the initial loss and making a small profit in the end. Double and triple tops/bottoms are a part of the classical technical analysis approach, the Western approach to charting the markets. They are so popular, that every trading book in the world mentions them.
Recommended Further Readings
- Financial Products to Trade
– Different categories of financial products that a Forex Broker is offering for the retail clients, starting with the classical currency pairs, and continuing with commodities, CFD’s, indexes, etc.
- Forex Trading Sessions and Their Importance
– Explaining the differences between the three Forex trading sessions, what are their importance, ranking, etc.
- Forex Brokers Types – ECN or STP?
– What is ECN, STP, how d- brokers deal with client’s orders, advantages, and disadvantages of the tw- types.
Other Educational Materials
- Encyclopedia of chart patterns Bulkowski, T.N., 2011. (Vol. 225). John Wiley & Sons.
- Charting Technical Trading Rules and the Lottery of Technical Analysis: Empirical Evidence from Foreign Exchange Market. Repkine, A. (2008).