Double Top and Bottom

*Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11am ET, as our risk management educator. With 30 years' experience working as an active investor in equities, commodities, futures and FX there are few better to talk on the subject of risk management.

Bob has developed a method for breaking down his key fundamentals of risk management, in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading. Below are some excerpts of Bob’s thoughts from a recent live session.

Some key points are as follows:

• A double bottom looks like the letter "W," while a double top looks like the letter "M."
• A double bottom consists of two lows, and those lows do not have to be equal.
• A double top consists of two highs, and those highs do not have to be equal.
• A double bottom reverses a downtrend, and a double top reverses an uptrend. Both patterns must show a clear rotation to be considered valid.

The sweet spot refers to the retracement level of the right-hand low in a double bottom or the right-hand high in a double top. For a double top, the right side must retrace at least 76.4% of the left-side swing, from the swing high to the swing low that formed the "V" of the "M" pattern.

Additionally, the same right-side high must not touch or exceed the 123.6% extension of the left-side move, from the swing high to the base. Simply put, the right-side high should fall between the 76.4% retracement and the 123.6% extension of the left-side move.

The right side must retrace at least 76.4% of the left-side swing, from the low to the peak that forms the "W" in a double bottom.

In addition, the same right-side low must not touch or exceed the 123.6% extension of the left-side move, from the swing low to the peak. Simply put, the right-side low must fall between the 76.4% retracement and the 123.6% extension.

Traders should review their charts across various time frames and look for examples. Here are some key things to pay attention to:

• Find 10 valid examples of double tops and double bottoms.
• Determine if the double falls within the sweet spot rules.
• Ensure that the double patterns are reversing a move, and that 100% of the target lies within the move that created the double.

If a double top or bottom is invalidated due to the sweet spot rule or target rule, note that on your chart. If the potential confirmed double returns to the sweet spot for a third time, record that on your chart as well. Then, observe the price action.

That’s the only way traders will get better at spotting these patterns.

It's not smart because when you try to catch the start of a reversal, the probability of success is only about 47%. Most of the time, it will hit a sweet spot, reverse, and stop you out. This means that in 53% of the trades, things will go wrong.

It is very tempting to try to get in early on these moves. I urge you not to. This is a risk-focused blog. My goal is to help traders understand that if you have a pattern where the target, trigger, and stop are all clearly defined, there’s no need to worry. It’s not smart, but you can experiment with them.

Live Sessions (hereafter referred to as the “Content”) are produced by TradeZero. The Content may include the views and opinions of TradeZero and a third-party participant, Bob Iaccino. Bob Iaccino is compensated by TradeZero for participating in the Content. Mr. Iaccino’s trading experiences and accomplishments are unique, and your trading results may vary substantially from his. TradeZero is not responsible for and neither affirms nor endorses any of Mr. Iaccino’s views or opinions expressed in the Content. TradeZero makes no representations or warranties with respect to the accuracy of the Content or information available through any referenced or linked third party sites. The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security.

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