The busted double top and double bottom are one of the most common pattern pairs in chart analysis. Here, you will learn more about the busted double bottom and tops pattern and how to apply the patterns to your binary options trading strategy.
Busted Double Bottoms and Tops Patterns
Both the busted double bottoms and tops are reversal patterns and indicate an imminent ending to the existing trend and the start of a new trend. They are an indication that the underlying asset is attempting to continue an existing trend, to no avail, therefore triggering a reversal of the pattern.
How to Identify the Double Top
The double top pattern forms at the height of an upward trend. It is an indication that the upward trend is ending and buyers are less in control. When this pattern is complete, the prevailing trend reverses.
This pattern typically forms an M shape. The first part of the pattern indicates the start of a new high in an upward trend. At its peak, the trend encounters resistance and goes to a support level. The second part of the pattern indicates that the trend is moving back to the resistance level and then sells back to the level of support. When the price of the underlying asset declines below the support level, the pattern becomes complete. This then marks the start of a downward trend.
This pattern usually forms when buyers and sellers are under pressure to sell and buy respectively. When the buyers are looking to lower the price of the asset, they may face resistance and this could keep the uptrend from continuing. As such, the buyers’ control of the market begins to decline and the sellers take control, permitting a new downtrend.
How to Identify the Double Bottom
The double bottom is the opposite of the double top pattern. It is an indication of a reversal of the downward trend to permit a new uptrend.
This pattern typically takes a W shape and it is formed when a downtrend creates a new low in the movement of the asset price. The downward trend encounters a support level, which keeps the asset from further decline. After encountering the support level, the asset price will increase to new highs and will then encounter a resistance level. This is followed by a decline in the price caused by a selloff in the market. The price then encounters support and increases back to its previous high. To confirm the pattern, the price of the asset needs to move beyond the resistance level faced on the previous uptrend.
Trading the Double Bottoms and Tops Pattern
When trading the double bottoms, it is possible to buy a put option with an expiry period of your choice including 1 hour, 30 minutes or 1 minute. This can be done if the support point is broken.
As a beginner trader, it is recommend that you make a modest entry when trading the double top pattern to avoid losses. If you have a bigger appetite for risk, it is important to keep an eye on the trade volume—when the volume is high in a downtrend, you could buy a put option.
As a beginner trader, you want to act expediently to take advantage of the sharp price decline. As you keep track of the breakdown, it is important to be ready with the order size and target price.
In binary options trading using the double top formation, it is very unlikely that a reversal would take place before the expiry period of 1 hour, 30 minutes or 1 minute. However, any news or external factors that support a rise in the price of the underlying asset would trigger a reversal in the trends, causing an out of the money expiration.
Trading the double bottom pattern is similar to trading a top bottom formation, given that both patterns have common attributes. However, in a double bottom pattern, the price breaks on top of the neckline to cause an end to the current downward trend.