Recognizing Double Tops and Bottoms

What are Double Tops and Bottoms?

Double tops and bottoms are chart patterns in technical analysis that signal a potential reversal in the current trend. A double top is formed when the price reaches a high point, retraces, and then fails to break through the previous high, creating a pattern that looks like the letter “M”. Conversely, a double bottom is formed when the price reaches a low point, bounces back up, and then fails to break through the previous low, creating a pattern that looks like the letter “W”.

Recognizing Double Tops

Step 1: Identify the High Points

Look for a significant high point in the price chart where the price reaches a peak and then retraces.

Step 2: Draw a Line Connecting the High Points

Draw a horizontal line connecting the two high points to form the “top” of the pattern.

Step 3: Look for Confirmation

Wait for the price to fail to break through the previous high point, signaling a potential double top formation.

Recognizing Double Bottoms

Step 1: Identify the Low Points

Look for a significant low point in the price chart where the price reaches a bottom and then bounces back up.

Step 2: Draw a Line Connecting the Low Points

Draw a horizontal line connecting the two low points to form the “bottom” of the pattern.

Step 3: Look for Confirmation

Wait for the price to fail to break through the previous low point, signaling a potential double bottom formation.

Trading Strategies

Once you have identified a double top or bottom pattern, you can use it to inform your trading decisions. For double tops, you may consider selling or shorting the asset as the price is likely to reverse downwards. For double bottoms, you may consider buying or going long on the asset as the price is likely to reverse upwards.