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Chart Patterns

Double Top and Double Bottom Chart Pattern

Next, we will learn another type of chart pattern i.e. ‘Double Top and Double Bottom

 

What are Double Top and Double Bottom Chart Patterns?

Double top and bottom patterns are chart patterns that occur when the prices of the stock move in a pattern that is similar to the letter "W" (double bottom) or "M" (double top). These patterns usually move over a longer period of time.

 

What is Double top?

A double top is another bearish reversal pattern that is very commonly used by the traders. The stock price will form a peak and then retrace back to a level of support. It will then form a peak once more before reversing back from the prevailing trend. It looks like the “M” pattern. 

 

What is Double Bottom?

A double bottom is a bullish reversal pattern that is totally opposite of a double top. The stock price will form a peak and then retrace back to a level of resistance. It will then form a peak once more before reversing back from the prevailing trend.

 

How to identify Double Top:

When identifying the double tops on the charts, the prior trend should be an uptrend. The first top is formed as an inverted U. Similarly, the second top is formed as an inverted U, both the tops either have the same or almost the same highs. 

The formation of this pattern is confirmed when the prices break through the neckline level of support and continue to move downwards. Also the volume should rise when the prices break the support.

 

Example:

 

We can see the examples of a Double Top chart pattern formed on the daily chart of Tata Motors Ltd.

How to identify Double Bottom:

When identifying the double bottoms on the charts, the prior trend should be the downtrend. The first bottom is formed as the letter U pattern. Similarly, the second bottom is formed as U, both the bottoms either have the same or almost the same low. 

 

The formation of this pattern is confirmed when the prices break through the neckline level of resistance and continue to move upwards. Also the volume should rise when the prices break the resistance.

                                                          

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Example:

We can see the examples of a Double Bottom chart pattern formed on the daily chart of Tata Motors Ltd.

Stop Loss and Price Target:

The minimum target is vertical distance from the M or W top, to the neckline post breakdown. Usually one can place stop loss above the neckline and take up a short trade as the neckline breaks.With an inverse pattern, stops are usually placed below the neckline and a long trade is taken up as the neckline is breached on the upside with high volumes. 

 

Double top and bottom formations are highly effective when they are identified correctly on the charts. However, you may incur losses when they are interpreted incorrectly. Thus, one should be careful and patient before trading this chart pattern.

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Units 4/14