For our example, we will discuss a double top, but the rules apply inversely to a double bottom.

A double top forms after a major trend. It is easily recognized as it forms an "M" at the top of a chart (or in the case of a double bottom, a "W"). When we analyze a chart that appears to give us a double top formation, it is important to remember the following rules:

1. The first top is the highest point of the current trend. Price retreats to form a valley, and then runs up again towards the first top.
2. When price forms a second top, we are still waiting for the setup of this pattern to be completed. A double top must move through the valley before we can consider taking a low risk short position.
3. Ideally, we want to see volume increase as the price falls through the support level established by the valley. Acceleration in the price's descent is also preferable. Remember, the more confirmation factors that you have in your favour, the better your odds of a winning trade.

Once price penetrates the valley of this M formation, we not only have our entry signal, but our loss stop and profit target are built into the pattern. The support that was created by the valley now acts as resistance, and we can set a stop just above this level to minimize losses should it reverse again. Measuring the distance from the peaks to the valley, and then applying that measurement from the broken support level downward can derive our profit target. This is illustrated in the chart for BCR.

The most common mistake made is to jump too early on a potential double top or bottom. Unless price breaks through the support created by the valley (in the case of a double top), we could be merely looking at a period of consolidation occurring. Improve your odds of entering a winning trade by allowing the setup of this formation to complete before "pulling the trigger".