Double Top and Double Bottom is a type of price reversal patterns.
These reversal chart patterns take a longer period to be formed.
Double Top resembles M pattern and indicates bearish reversal whereas Double Bottom resembles W pattern and indicates a bullish reversal.
The Double Top and Double Bottom chart patterns are usually formed after consecutive rounding tops and bottoms.
Let us discuss in details the psychology behind the formation of these reversal chart patterns and how to trade with them.
What is Double Top Pattern?
A double top chart pattern is a bearish reversal chart pattern that is formed after an uptrend.
This pattern is formed with two peaks above a support level which is also known as the neckline.
The first peak is formed after a strong uptrend and then retrace back to the neckline.
After reaching back to its neckline, the price becomes bullish and rises again to form the second peak.
The formation of this pattern is completed when the prices move back to the neckline after forming the second peak.
When the prices break through the neckline or the support level then the bearish trend reversal is confirmed.
What is Double Bottom Pattern?
A double bottom chart pattern is a bullish reversal chart pattern that is formed after the downtrend.
This pattern is formed with two lows below its resistance level which is also known as the neckline.
The first low is formed after a strong downtrend and then the prices retrace back to the neckline.
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After reaching back to its neckline, the price becomes bearish and falls again to form the second low.
The formation of this pattern is completed when the prices move back to the neckline after forming the second low.
When the prices break through the neckline or the resistance level then the bullish trend reversal is confirmed and traders can enter a long position.
Formation of Double Top and Double Bottom Pattern:
Here is how double top and double bottom chart pattern is formed –
What do Double Tops and Double Bottoms tell traders?
A double top and double bottom chart pattern traders indicates possible trend reversal to the traders.
Like other technical indicators and chart patterns, the double top and double bottom patterns do not indicate certain trend reversals.
Traders should always use the chart patterns with other indicators such as volume for confirming the reversal before taking a position.
Trading with Double Top:
There are certain rules when trading with Double Top chart patterns.
- Firstly one should see the market phase whether it is up or down. As the double top is formed at the end of an uptrend, the prior trend should be an uptrend.
- Traders should spot if two rounding tops are forming and also note the size of the tops.
- Traders should only enter the short position when the price break out from the support level or the neckline.
Example:
From the below example of the daily chart of Tata Motors Ltd. we can see how bearish reversal takes places after the formation of the double top at the end of an uptrend:
Stop Loss:
In the case of a Double Top chart pattern, the stop loss should be placed at the second top of the pattern.
Price Target:
The price target should be equal to the distance between the neckline and the tops.
Trading with Double Bottom:
There are certain rules when trading with Double Bottom chart patterns.
- Firstly one should see the market phase whether it is up or down. As the double bottom is formed at the end of the downtrend, the prior trend should be the downtrend.
- Traders should spot if two rounding bottoms are forming and also note the size of the bottoms.
- Traders should only enter the long position when the price breaks out from the resistance level or the neckline.
Example:
From the below example of the daily chart of Tata Motors Ltd. we can see how bullish reversal takes places after the formation of the double bottom at the end of the downtrend:
Stop Loss:
In the case of the Double Bottom chart pattern, the stop loss should be placed at the second bottom of the pattern.
Price Target:
The price target should be equal to the distance between the neckline and the bottoms.
Key Takeaways:
- A double top is a bearish reversal chart pattern that is formed after an uptrend.
- A double bottom is a bullish reversal chart pattern that is formed after the downtrend.
- Traders should always use double top and double bottom chart patterns with other indicators such as volume for confirming the reversal before taking a position.
- There are certain rules when trading with Double Top and Double Bottom chart patterns.
Happy Learning!
