Understanding how the Double Top and Double Bottom Pattern works.
The Double Top Pattern and Double Bottom Pattern are two of the most commonly cited Chart patterns for any market. It is easy to spot and easy to explain to an audience that does not have access to a chart at the given time. In fact, it is a chart pattern that is easy to imagine and understand the consequences.
The Double Top Pattern
A Double Top Pattern will touch a resistance point twice on two different lumps in a chart. This is a bearish pattern that should be traded once it passes through the confirmation line. The confirmation line is a horizontal line that goes the low in between both lumps featuring the highs.
The Double Top Pattern in practical usage on a chart.
What a Double Top Pattern must have:
- Two distinct lumps
- Both lumps must fail to go above the same exact price and hit almost the exact same point.
- The confirmation line is the low of where the original lump was formed.
How Does the Double Bottom Pattern Work?
A Double Bottom Pattern will touch a support point twice on two different lumps in a chart. This is a bullish pattern that should be traded once it passes through the confirmation line. The confirmation line is a horizontal line that goes the high in between both lumps featuring the lows.
The Double Bottom Pattern in practical usage on a chart.
What a Double Bottom Pattern must have:
- Two distinct lumps
- Both lumps must fail to go below the same exact price and hit almost the exact same point.
- The confirmation line is the high of where the original lump was formed.
Testing a Double Top and Double Bottom Pattern Indicator
The testing conditions will involve each pattern being used separately on its own for entries. There will be different timeframes used and different currency pairs.
Timeframes Used: 1 Hour, 4 Hour
Currency Pairs Used: EURUSD, USDJPY, AUDUSD, GBPUSD
Take Profit Criteria: Tom Bulkowski’s Measure Rule for each pattern, but with an averaging that disregards the shape of the bottom. The formula does not change much based on the bottoms.
- Double Bottom: Highest Peak in the Chart Pattern + ((Chart Pattern Peak – Trough) * 66%)
- Double Top: Lowest Valley in the Chart Pattern – ((Chart Pattern Peak – Trough) * 72%)
Stop Loss Criteria:
- Double Bottom: Lowest Valley in the Chart Pattern.
- Double Top: Highest Peak in the Chart Pattern.
Time Period Tested: July 1, 2016 through June 30, 2018
Double Bottom Pattern Backtests
4 Hour Chart – EURUSD
1 Hour Chart – EURUSD
4 Hour Chart – USDJPY
1 Hour Chart – USDJPY
4 Hour Chart – AUDUSD
1 Hour Chart – AUDUSD
4 Hour Chart – GBPUSD
1 Hour Chart – GBPUSD
Double Top Pattern Backtests
4 Hour Chart – EURUSD
1 Hour Chart – EURUSD
4 Hour Chart – USDJPY
1 Hour Chart – USDJPY
4 Hour Chart – AUDUSD
1 Hour Chart – AUDUSD
4 Hour Chart – GBPUSD
1 Hour Chart – GBPUSD
What can be concluded?
When it comes to meeting the Measure Rule with the Stop Losses being what they were, the indicator that detects Double Tops and Double Bottoms is inconsistent in terms of success. However, it does point out the breakout spots where it makes sense. The Double Tops and Double Bottom Patterns are not perfect in their aesthetics, but they qualified as Double Tops and Double Bottoms.
It is possible with a tighter Take Profit point that there would be a better result for all and further sensitivity analyses are required. Using the Double Top and Double Bottom with a filter may also prove to be effective.
When it comes to timeframes, the longer timeframe chart (4 Hour) was more effective than the shorter timeframe chart (1 Hour). However, there were less trades made due to the slow development of the patterns to form and the much larger amount of breathing room for a trade to run its course.
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