DOUBLE TOPS/BOTTOMS

🔵The double top and double bottom are a pattern that can be used to find a counter-trend trading opportunity. This pattern can also be used as an entry technique in the markets. When this pattern is seen, the market is signaling to traders that a particular level of structure is important because price action is refusing to break and close above or below it.
A double top and bottom are a sign that the market is failing to break through previous levels. When identifying a trend continuation pattern in bullish market, the trader is looking for a new high in a price action, followed by a pullback, followed by the market again hitting a new high. In cases of a double top, the market does not rally high enough or close above the previous top, indicating that the price action does not have strength to break through the previous level.

🔵Filters
Although it is possible to trade the double top and bottom successfully as mentioned above, I have added a few filters to eliminate some of the false signals and to be sure that I take only the high probability trades. There are many different filters that you can use when trading, but the main one I use is the Relative Strength Index (RSI). I look for overbought and oversold conditions as well as divergence to help me make decisions.
When identifying this pattern, I first look for the RSI to be overbought for double top and oversold for double bottom. If this happens, then I have a valid trigger bar. After price action retests the trigger bar, I look for divergence.

🔵Divergence:
A divergence between the RSI and price is formed when the two send contradictory signals. If price is producing repeated high and lows, the RSI should also be trending up. Divergence occurs when price is producing higher highs and higher lows, yet the RSI shows a higher high, then a lower high. In the case of a double top, as price action gives us an initial high (trigger bar), followed by an equal high (the retest), the RSI usually prints a lower high, suggesting that the trend may be losing momentum.


🔔The best place to put stop loss is above or below double top/bottom.
As with any trading technique, your stops for this pattern will ultimately be up to you and I would advise that during your back testing you test out multiple areas, but here are some common rules that I use for this pattern. When placing a stop on a double top and bottom, I will take 1-2 ATR way and put it above or below the high and low of the pattern.