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Home | CTI Blog | Forex Education | Double Bottom And Double Top Pattern: Reversal Or Liquidity Trap?

Double Bottom And Double Top Pattern: Reversal Or Liquidity Trap?

By Scott Geekie
November 22, 2023
11:34 am
Forex Education

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=Double Top Pattern or its bullish counterpart, Double Bottom Pattern and how to trade them, are easy enough to find with a simple search. You will find hundreds of examples along with the promises of trading success they come with. You will be told how they signal a trend reversal, how easy they are to trade, and how these patterns cause the market to change direction.

But do these patterns really signal a reversal? Or are you being led into Liquidity Pools to donate your capital to the institutions that manipulate market movements?

You were probably searching for how to trade Double Top Pattern or Double Bottom Pattern when you landed on this article, and yes, you will learn how to trade them here, but not by blindly following a pattern like the rest of the retail-minded sheep.

In this article, we will look at what causes this double top and double bottom formation, and in doing so, you will see that the pattern is a product of a market narrative and not a signal that the entire market magically follows.

What is a Double Top Pattern or Double Bottom Pattern?

A Double top Pattern or Double Bottom Pattern is the name given to a pattern with two highs or lows, sometimes referred to as an M or W pattern.

Double tops are the formation of two consecutive peaks creating an ‘M’ shape. Double bottoms are two consecutive lows that form a ‘W’ chart pattern.

No matter what a pattern is called, it makes little difference to the fact that the pattern itself has very little value in predicting the future direction of the market.

This is before we run into the problem of individual perception. Traders are prone to trying to impose their will on price and, with this tendency, can start to see these patterns more often than they actually form.

The only way to avoid this is to have defined conditions that confirm the Double Top Pattern / Double Bottom Pattern has played out.

How to Trade Double Top Pattern / Double Bottom Pattern?

So, what confirms a Double Bottom Pattern?

Should the two highs be at the exact same level? Or should the second high not close above the first? Or maybe the second high should, in fact, run above the first?

Here is where we run into another problem with viewing the market from a purely pattern-based understanding. These are open to too much interpretation.

But there is a second step in this process that is alleged to confirm the change in direction, that price runs through the neckline or the high that forms between the two lows in the case of a Double Bottom Pattern. While this has some merit in that it confirms a shift in short-term market structure, it has its limitations; instead of explaining, let’s look at a few examples of Double Bottom Patterns.

In the case of a Double Top Pattern is the reverse of everything for a Double Bottom Pattern.

In the example above, the higher time frame trend is bullish and currently pulling back before continuing higher. So, on our lower time frame, we could expect a reversal of the trend to be bullish, so it would make sense to be looking for a Double Bottom Pattern to get us into a trade in line with the higher time frame trend.

All three of the trades we took met our criteria of a Double Bottom Pattern as best as we could see. There are two lows; most online examples we found to be ambiguous about which, if any, of the lows should be lower.

So we enter the trade on the break above the neckline or the high between the two lows.

With a rather small but reasonable 2R target after two trades, we have taken 2 losses and only by getting into a third, rather aggressive entry are we able to recover the loss, so this becomes a break-even day trading Double Bottom Pattern.

There is one more time this day that a Double Bottom Pattern plays out. You can see it on the far right of the chart after the third trade.

But after losing two trades in a row and then scraping back to break even, would you take this trade?

Would your psychological state be such that you would risk taking a loss again? or would you decide not to take the last trade that would have taken your balance 2R into the positive, only to be frustrated further because of the missed trade?

This is one of the many issues faced by traders who only have a narrow retail view of the markets and follow patterns alone without fully understanding the institutional liquidity and how to capitalise on them.

How to Increase Win Rate Using Double Bottom Pattern / Double Top Chart Patterns?

Is it possible to filter out these strings of losses?

This is the question asked by retail traders repeatedly, often followed by a search for the next indicator that claims to filter losing trades.

What if instead of blindly taking trades based on a pattern alone, there was a way to know where the price is targeting, where the real reversal will happen?

Instead of relying on probabilities to play out and being forced to take every setup and adding more and more of your trading capital into the Liquidity Pool for the Smart money to use to their benefit for fear of that trade being the one that it all worked out on, could it be possible to predict the pattern and the price level that pattern would play out at?

The short answer is yes, but how?

Use Higher Time Frame Points Of Interest to Increase Double Bottom Pattern's Win Rate

What are the higher time frame points of interest? In short, they are areas where Smart Money or institutions have placed their positions previously, and the charts have shown their intentions by the movement of the candles on a higher time frame. There are a few different schools of thought on these points of interest, on which we have published articles before.

Order Block In Forex, 4 Insane Rules To Add To Your Strategy

Supply And Demand In Forex: Secrets To 10X Your Results

Both of these articles explore what could be referred to as higher time frame points of interest.

In the above example, this higher time frame point of interest was a higher time frame order block, as shown in the image below.

Double Bottom Pattern at higher time frame institutional reference point

So by following this principle of waiting for the higher time frame to pull back to a point of interest, we could reasonably expect the higher time frame to continue on its move higher.

A basic understanding of Market Structure states that the market and its movements are fractal, which, in simple terms, means that each short-term move on any time frame is a trending move on lower time frames, for example, an upward trend on an hourly chart is just a pullback on a daily chart.

So, trying to trade a possible trend reversal with the use of a pattern like a Double Top or Double Bottom can be tricky unless one bears in mind that while trying to trade a reversal on the lower time frame, on a higher time frame, you could be trading a pullback.

It would seem reasonable that only when that pullback has gathered enough liquidity or market participants will it continue.

This is most often at or around a point of interest, like an Order Block or area of Supply or Demand on a higher time frame.

By combining this analysis on multiple time frames, you will dramatically increase a pattern like a Double Top Pattern or Double Bottom Pattern success rate.

Why Do the Double Top Patterns or Double Bottom Patterns Fail?

In the opening of this article, I mentioned Liquidity Pools and combined it with the previous section on the fractal nature of the market.

Before we go back to our examples, it is important to understand a little more about Liquidity Pools.

This is covered in this article: 1 Minute Scalping Strategy You Must Know!

But let’s look into it here. In short, above every high and below every low, there are orders building up or pooling that take the opposite side of the trades of retail traders.

For example, in a Bullish Scenario, retail traders have their Stop Losses of their long position below Double Bottom Patterns.

Looking at the market from an institutional perspective, these Sell Orders, in the form of retail traders and speculative institutions’ Stop Losses, act as liquidity for the Large Financial Institutions that would buy where retail would sell, taking the opposite side of trades.

So, as the market is pulling back in a bullish trend, the price keeps running the lows of the Double Bottom Pattern until Liquidity is exhausted.

Now, let’s look at our example again with the Liquidity Pools marked.

Each time the price runs into these Liquidity Pools, there is a reaction, and this is possibly a tradeable move on a lower time frame, another fractal of the pullback that is playing out.

But these Liquidity Pools are not enough to fill the positions of the institutional trades. We only briefly move higher, only to continue lower again until reaching the point of interest we identified earlier, such as an Order Block.

Can Double Top Pattern and Double Bottom Pattern Be Profitable?

In conclusion, the pattern itself has very little to do with the movement of price, and instead of looking purely at the pattern, the area in which it plays out is more important.

What’s even more important is to understand higher time frames (such as 4H or Daily) trends and trade those patterns only in the direction of the higher time frames. This is because you should be trading in the same direction as the Large Financial Institutions.

If the price is in a higher time frame at a point of interest, then, and only then, you would be looking for a Double Top Pattern or Double Bottom Pattern to trade.

Also, understanding Liquidity Pools is of massive importance as this will give you an understanding of where the price wants to go.

We go into how Liquidity Pools work in detail in our Bank Level Trading “BLT” Course; if you are interested to know more about it, then join this course for more details.

Scott is the CMO at CTI and a trader since 2018. He leads CTI’s marketing with a straightforward, no-nonsense approach, cutting through the hype that surrounds the trading industry. He believes that any trader can achieve success with the right mindset and psychology, rather than constantly chasing the next big strategy. Through his work, he helps traders see past the noise and focus on what actually leads to long-term success.

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Double Bottom And Double Top Pattern: Reversal Or Liquidity Trap?

Share this article with others

What is a Double Top Pattern or Double Bottom Pattern?

How to Trade Double Top Pattern / Double Bottom Pattern?

How to Increase Win Rate Using Double Bottom Pattern / Double Top Chart Patterns?

Use Higher Time Frame Points Of Interest to Increase Double Bottom Pattern's Win Rate

Why Do the Double Top Patterns or Double Bottom Patterns Fail?

Can Double Top Pattern and Double Bottom Pattern Be Profitable?

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