Double Bottom/ Double Top
Double bottom and double top are types of price reversal patterns. These patterns often take a lot of time to form on the chart. The pattern “M” indicates the double top price reversal pattern related to a bearish reversal. And “W” shows the double bottom price reversal pattern and pertains to a bullish reversal. When consecutive round tops and bottoms are formed, these patterns are indicated on the reversal chart.
Table of Contents
What is the Double Top Pattern?
It usually forms after an uptrend. The double top pattern represents the bearish reversal chart pattern. It is created by joining two peaks above the neckline (also known as the support level). When a strong uptrend occurs, it covers the first peak and then moves down to the neckline. As soon as the line reaches the neckline and turns bullish, the bar again rises to form the second peak. When both peaks meet, the reversal chart is completed and represents the double top pattern.
What is the Double Bottom Pattern?
Unlike the double top pattern, the double bottom pattern is the price reversal pattern that indicates a bullish reversal chart pattern. Here, the downtrend constantly forms this type of pattern.
When two lows are below the resistance level (also called neckline), the double bottom pattern is formed.
When a strong downtrend occurs, it leads to the formation of the first low. Then, as soon as it reaches the neckline, the price again falls and forms the second low.
This pattern is known as the bullish pattern reversal. Once you see the “W” pattern in the chart, a double bottom is formed.
Formation of Double Top and Double Bottom Pattern
Double tops and double bottoms are two main patterns of the price and are represented by the M and W shapes, respectively.
The M pattern is formed when there are two peaks that join above the support level, or the neckline, and it is known as a double top. In this case, the pattern formed is indicated by the bearish reversal. On the other hand, the W pattern begins when the two peaks join below the resistance level, or the neckline, and it is known as a double bottom. In this case, the pattern formed is indicated by bullish reversal.
What do Double Tops and Double Bottoms tell traders?
Double tops and double bottoms are the two major types of a price reversal pattern. This is one of the best ways by which traders can know what is happening in the market. However, when compared to other chart patterns and technical indicators, the double top and double bottom do not represent some of the trend reversals.
Before trading, the traders need to study the chart patterns with some of the other indicators. This is one of the best ways to trade and gain a high return on investment.
How to trade double tops and double bottoms?
While trading with double tops and double bottoms, you need to know specific rules and regulations.
- First, it’s vital to understand the market phase to check whether it is up or down. A double top is always formed after an uptrend; you need to check the prior trend before trading.
- The next step is to check the two tops and their size before trading.
- Always enter the market in the short position when the breakout price is either from the neckline or support level.
- Like the double top, traders should check the market trend to know if it is up or down. If the prior direction was a downtrend, you could rest assured that the pattern formed is the double top.
- Check out the rounding bottoms of the curves and the size of each base.
- Always enter the market in the extended position when the breakout price is either from the neckline or resistance level.
Limitations of Double Tops and Bottoms
By identifying the patterns correctly, you can know how everything will be traded in the market. You can see how the double top and double bottom will be affected. But if you can’t thoroughly identify the pattern, it would be hard for you to trade in the market. Before jumping to a conclusion, one must pay extra attention to the patterns and how they are created. What’s more, judging solely on the basis of the line or pattern formation will lead to false interpretations. This, in turn, will lead to quite an early exit from a particular position.
Frequently Asked Questions
The pattern indicated by the two peaks is the simplest way to determine if it is the double bottom or double top. If the double bottom peaks are rising in the upward direction and are forming two peaks, the trend reversal takes place from double bottom to double top.
The bullish reversal pattern usually indicates the double bottom pattern, and it is formed after a downtrend.
Once the reversal pattern reaches the double top, the chances are that the price will bounce off slightly. Then, the price will return, and it will be tested again.
The double top pattern indicates if the bearish trend is transforming into a bullish trend. Once there is a strong uptrend, the following pattern will be a double top. You can use the double canopy to enter the market in the extended position.
Before you trade the M (double top) and W (double bottom) patterns, you must thoroughly identify the drop and rebound. This will help you to avoid risk and trade effectively.
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