Double Tops/Bottoms

Double Tops:BottomsThe Tops and Bottoms are among the most popular reversal patterns among binary brokers and as the name suggests, the double tops are reversal patterns and it comes at as a bullish trend comes to an end while the double bottoms are reversal patterns which come as bearish trends come to an end. These patterns are very popular and at times they even tend to appear all over the charts as M or W shapes.

The double tops and bottoms usually have a measured move which should only be considered after the market prices break the all-important trend line, which is the line that defines the M or the W shapes made by these patterns.

Reversal Pattern with a Measured Move

When we say that reversal patterns such as the double tops and bottoms have measured moves and it looks like the head or inverted head and shoulders or inverted shoulders patterns. Therefore, this pattern should be quantified in the same manner that the head and shoulders and inverted head and shoulders pattern is quantified; by drawing a line highs and lows of the top and bottoms to the line that defines the M and W shapes formed and then projecting the line at that specific moment to the point at which the trend line is broken. This measured distance is the minimum distance that the market prices should move.

But Options When the Price is Breaking the Trendline

since we are looking at how to use this pattern in trading binary options, we should concentrate on buying put or call options only when the market prices break below or above the trend line. Any other condition shows that the double tops or bottoms are yet to be confirmed and if the trader trades at that time, he or she risks being found in an unwanted territory by the market prices.

If at any point the trend line is not broken, the trader should forget about trading this pattern. The trader has to wait till the trend line is broken by the market prices s that to ensure that the pattern is confirmed.

Another thing worth noting is that the double tops and bottoms are in a way similar to the triple tops and bottoms, with the only difference being that the double tops/bottoms come in a more simple way, since they only have two points which are usually taken to be part of the M and W shapes.

Also, when compared to the triple tops and bottoms, the double tops and bottoms are usually stronger. The triple tops and bottoms mainly indicate that the market prices are headed to forming a triangle instead of making a reversal pattern as in the case with the double tops and bottoms. Therefore, it is unlikely that the triple top/bottom can hold on a number testing as those kinds of triangles is usually continuation patterns.

What Would Indicate a Double Bottom or Top?

As per the Elliott Waves Theory, the double tops or bottoms pattern is most likely a flat/level pattern, which means the pattern should possess the b wave that is in a way similar to the one of the wave.

This simply means that the b wave should retrace for more than eighty percent of wave a. This makes the whole flat to resemble a double bottom or top. On the other hand, if the c wave follows such a pattern it is viewed as an impulsive move also referred to as a five waves structure. These kind of impulsive price moves are very aggressive resulting in the creation of the impression that the market is truly rejected from a double bottom or top pattern.

But in actual sense, this is usually a pattern which might or might not get to the measured move as indicated at the start of this article.

Flat – Pattern with a Wave C

Flat pattern is usually a pattern with a wave c that moves way higher compared to the length of wave a, which creates very high chances of us seeing a measured move taking place. However, if this doesn’t happen, then the trader should not insist in the same direction since by the time the flat is fully formed, the market will either be consolidating in that region or it will be reversing the previous trend.

In trading binary options, such a pattern should at all times be accompanied by an indicator of some sort and most advisable an oscillator. The trader should just wait for the oscillator and price to diverge at the point where the double top or bottom is forming. This becomes the signal that the market is looking forward to reversing.

Identifying the Divergence Pattern

When a double bottom pattern is formed the trader should always buy call options while if a double top pattern if formed the trader should always buy put options. The usual rules still apply here: the larger the time frame, the larger the expiration date the trader should consider, and also the smaller the risk there is.

But in case the bottoms or tops pattern or even a divergence is identified on a lower time frame, for example, let’s say, the 15 min chart, the trader can still go ahead and use the hourly expiration date as well. Cases like these present themselves in complex corrective waves at the time the market is just looking for more time to consolidate.

Start trading now by opening a FREE account on one of our recommended brokers.

Recommended Binary Option Brokers:

 Min. InvestMin. DepositMax. Returns   
All brokers >>

References/Further Reading:

  1. Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test (Andrew W. Lo  A. Craig MacKinlay)
  2. Long-term Memory in Stock Market Prices (Andrew W. Lo)
  3. Random Walks in Stock Market Prices (Eugene F. Fama)
  4. The Determinants of the Variability of Stock Market Prices (Sanford J. Grossman, Robert J. Shiller)
  5. The Random Character of Stock Market Prices (P. H. Cootner)