Everybody wants to ride the most robust trend possible, for as long as possible. Because of that, one primary task is to enter a direction as fast as possible.
To do that, one needs to anticipate the start of it. Or the end of the previous trend, if any.
For this reason, traders look for patterns that usually form before significant reversals. Such patterns bear the name of reversal patterns because this is what they do: they signal the end of a trend and the potential start of a new one.
In technical analysis, there are many patterns that fit into this category, and the major difference between them comes from the source that invented them. The Western approach of technical analysis comes with patterns like the head and shoulders, ascending and descending triangles, etc., while the Japanese one comes with candlestick techniques.
Part of the Western approach, the double and triple bottom patterns signal the inability of price to continue the previous trend. In doing that, it fails at around the same level.
When it fails two times, the market forms a double top or bottom. When it does the same thing for three consecutive times, a triple top or bottom appears.
What Makes a Double or Triple Top/Bottom
In the Forex market, the levels are far from being exact, due to the immense volatility that surrounds the currency trading arena. As such, traders should adjust the patterns to the FX market’s reality.
It is not the same in markets like the equity one, for example, or in low volatility environments. In this case, it is common for the market to fail almost at the same level.
What’s valid for a double top or bottom is correct for the triple one as well. Therefore, the chart below should explain both patterns.
In this case, the EURUSD pair seemed to form a double top a little bit above the 1.20 level. What traders do in this case is to wait when the so-called baseline of it gets broken.
They place a pending sell stop order at the bottom of it, and the take profit when the measured move ends.
However, because the double top is a reversal pattern, the idea is to keep the trade open for as much as possible, using a trailing stop.
As the picture above shows, the pattern has the shape of the letter M, while a double bottom has the form of the W letter. This resemblance is enough for traders to spot them correctly and to trade accordingly.
The bigger the time frame, the stronger the pattern is and its implications as well.
For a triple top or bottom, the trading steps look similar, only that the market fails three consecutive times at approximately the same level.
Double and triple tops and bottoms represent great reversal patterns. Traders focus on getting into the action as fast as possible and then trail the stop for both protecting the existing profits and positioning for the new trend.
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