In the case of a double top, it is reasonable to expect that the decline will continue at least as far below the imaginary support line connecting the two tops as the distance from the higher of the twin peaks to the support line. Therefore, the greater the distance from peak to valley, the greater the potential for the impending reversal. Similarly, in the case of a double bottom, it is safe to assume that the upswing will continue at least as far up from the imaginary resistance line connecting the two bottoms as the height from the lower of the double bottoms to the resistance line. Once this minimum objective has been met, the
trader might want to set a tight protective stop to lock in a significant portion of the unrealized profits.
Estimated Risk
The imaginary line drawn as a tangent to the valley connecting two tops serves as a reliable support level. Similarly, the tangent to the peak connecting two bottoms serves as a reliable resistance level. Accordingly, a trader might want to set a stop-loss order just above the support level, in case of a double top, or just below the resistance level, in case of a double bottom. The goal is to avoid falling victim to minor retrenchments, while at the same time guarding against unanticipated shifts in the underlying trend.
If the closing price of the day that sets off the double top or bottom formation substantially overshoots the hypothetical support or resistance level, the potential reward on the trade might barely exceed the estimated risk. In such a situation, a trader might want to wait for a pullback before initiating the trade, in order to attain a better reward/risk ratio.
