When trading, it is being said that the trend is your friend and therefore everyone wants to ride a healthy trend by buying dips in a bullish trend or selling spikes in a bearish one. This is a perfectly good strategy with one major flaw though: strong trends are not that common.
However, when market is trending, there are two things to look for. The first one is to look for continuation patterns, namely patterns that once broken will be followed by price resuming the original path. The next thing to look for is a trend reversal, meaning patterns that are usually forming at the end of a trend.
In this category, the most powerful reversal patterns are the double or triple top or bottom. Out of the two, the double bottom/top is more common than the triple one and it is only logic because market participants spotting such a pattern will exit their trades and the more aggressive ones with start trading in the opposite direction.
A double bottom is looking like the letter W while a double top like the letter M and the first one is forming after a bearish trend while the second one appears after a bullish trend. One thing needs to be mentioned here though; it is not mandatory for the two lows or highs that characterize these patterns to be exactly from the same levels. It is the area that matters.
Both double bottom and tops are coming with a so called measured move, and this one is considered to be the move markets make for the whole W or M letter, projected on the top/bottom of it. It is only a measured move though in order to confirm the pattern, as being a reversal one, it means the trend is done and a new move starts.
When it comes to the triple bottom or top pattern, it is basically similar with the double one, only that market is making another swing before reversing. Like mentioned earlier, they are really rare and chances are that when one sees a triple bottom market to actually form a triangle that may be a continuation pattern and therefore the reversal is not happening.
Between the two patterns, the triple bottom is obviously more powerful and has bigger implications when it comes to the new move to follow so finding one is really important.
There are various places where double or triple tops or bottoms are forming, depending on the trading style/theory used to analyze markets.
When it comes to the Elliott Waves theory, a double bottom or top is usually showing a flat pattern that is forming at the end of a complex correction and normally upon completion market has a violent move in the opposite direction.
The triple top and bottom on the other hand looks like a triangle at the end of a complex correction and this triangle most of the time forms as the last corrective wave of a double or triple combination. It goes without saying that the move to follow will be more powerful in this case than the one that follows a double bottom or top.
As mentioned at the start of this article, double tops and bottoms are really common and their importance grows the bigger the time frame the pattern is forming on. For example, a double top or bottom on the monthly chart has far bigger implications than one that is found on the hourly chart.
How to trade such patterns though? One way is to use an oscillator and start looking for market to form a divergence with the oscillator while price is forming a double top or bottom with the second swing to marginally take the highs or the lows of the previous swing. This ensures the divergence and it is living proof that a top or a bottom may be in place.
The best oscillator to spot such a divergence is the RSI (Relative Strength Index) and here on ForexGator.com we have a learning article explaining exactly how to interpret divergences that form between price and RSI. Using those examples and applying them to a double or triple top or bottom will only confirm the fact that market is trying to reverse after a strong trend.
Many traders go for the measured move only and place pending orders to buy or sell for a 1:1 risk reward ratio and by the time the target is hit, they exit the trade. The logic behind this is that after the ratio is filled, traders are looking for a pullback in the new trend to be bought or sold (depending on the direction of the new trend) for a better entry and this pullback will only be a confirmation that market indeed is starting to trend, only this time in the opposite direction.