Double top and Double bottom Patterns guidelines (PDF)

Double top and double bottom patterns belong to the category of chart patterns. It is a reliable pattern that can be used to signal potential trend reversals of a financial instrument in the market. Or simply indicates that the price is unable to continue moving in the present direction. A double top pattern indicates that the uptrend may be ending, while a double bottom indicates that the downtrend may be ending. These chart patterns take a longer time to form. However, traders use them to make decisions, but sometimes, they can give false signals. In this course, we will discuss the double top and the double bottom patterns, explain what is each one, and how to trade them.

Double top and Double bottom patterns

What is double top and double bottom patterns?

The double top and double bottom chart patterns generally emerge after a trend move, where the price of a security moves in a shape that resembles the letter ” M” when it corresponds to the double top pattern. And resembles the letter ” W ” when it corresponds to the double bottom pattern. Moreover, these patterns develop over a longer period of time, and do not always display the ideal shape of the letters ” M ” and ” W ” because the price movement does not necessarily look like these letters.

When examining this pattern, you should keep in mind that the peaks and troughs do not have to reach the same level in order for the double top and double bottom patterns to appear. Double top and double bottom patterns consist of two successive tops and bottoms. Moreover, they can be used in technical analysis to explain movements in financial instruments or any other investment and can be employed as part of a trading strategy to benefit from recurring patterns.

Double top pattern example

Double top pattern is a bearish reversal chart pattern that starts with a strong bullish trend. It is formed with two successive rounding peaks located above a support level, which is named the neckline. In fact, the first peak comes after an extended uptrend move, then retrace to the neckline. After hitting back to the neckline, the price shifts to bullish and rises once again to form the second peak.

Besides, the second top of the pattern can not break the height of the first top, so it will be always just below the first peak. This gives traders a sign that a reversal is going to happen because it indicates that the buying pressure is just about to finish. In addition, we consider the formation of the pattern completed once the price moves back to the neckline after the second peak is formed. However, once the price breaks the neckline, the bearish trend reversal is approved.

Double top pattern

Double bottom pattern example

Double bottom pattern is the same formation as the double top pattern but upside down. It has the shape of the ” W ” letter. However, it is essentially a bullish chart pattern that starts with a strong bearish trend. This pattern formed with two successive rounding bottoms located below a resistance level (neckline). Therefore, the first bottom arrives after an extended downtrend move, then retraces to the neckline. After hitting back to the neckline, the price shifts to bearish and drops again to form the second bottom.

The second bottom does not have to be at the same level as the first bottom. Generally, the bottoms occur at a narrowly different level. This signals that the selling pressure is about to finish and a reversal is going to happen. Moreover, the formation of the pattern considered completed, only when the price moves back to the trendline after the second bottom is formed. However, once the price breaks the neckline, the bullish trend reversal is approved.

Double bottom pattern

What do these patterns indicates ?

Double top and double bottom patterns can inform traders about a potential trend reversal. On one hand, the double top tells a bearish reversal as there are two elements of bearish proof. The first one is that the price reaches a resistance level, which corresponds to the first peak, and it can not exceeds this level in the second peak. And the second proof is when the price falls below the previous swing low, forming a new swing low. These represent the characteristics of a downtrend.

On the other hand, the double bottom tells a bullish reversal as there are two pieces of evidence to confirm that. When the price reaches a support level in the first bottom and it can not exceed that level in the second bottom. Then, when the price moves above the previous swing high, forming a new swing high. Which represents the features of an uptrend. 

How to trade double top and double bottom ?

It is not difficult to trade double top and double bottom patterns, but you should follow these steps accurately:

Double top trading example 

1. Identify the bullish trend: In order to identify the double top pattern, you should make sure there is a trend. If not the pattern will consider invalid. Therefore the double top pattern should start with a bullish trend.

2. Creation of the first top: Each top preceded by an uptrend, could signal the birth of the pattern. Thus, you need to carefully observe the price movement at swing highs in your chart.

3. Creation of a bottom: Once the first top is created, the price retraces and forms a bottom.

4. Formation of the second top: The price will rise once again after the retrace, which will give birth to the second top.

5. plot the neckline: to plot the neckline you need to go back to the swing bottom which located between the two peaks, then draw a horizontal line at this price level.

6. Pattern confirmation: to confirm the pattern, you should wait for a bearish breakout to occur.

7. Enter the trade: Once the pattern is confirmed, you can enter the trade in the direction of the breakout and open a short position.

8. Placing stop loss: You should place your stop loss at or just above the second peak of the pattern.

9. Profit target: After entering a short position, you need to put a possible target. To do that you should measure the size of the pattern. connect the two peaks with a line, then put another perpendicular line connecting the neckline and the line between the two peaks. This distance represents the size.  After that, apply this distance downwards starting from the neckline.

10. Trade exit: When the price reaches the minimum target you should exit the trade.

Trading

Double bottom trading example

1. Identify the bearish trend: Double bottom pattern should start with a bearish trend to consider valid. 

2. Creation of the first bottom: Each bottom perched by a downtrend could indicate the beginning of the pattern. Therefore you should make an eye on the price action at swing lows in your chart.

3. Creation of the top: The price retraces and forms a top.

4. Formation of the second bottom: The price will fall once again and forms the second bottom. 

5. Draw the neckline: You need to go back to the swing top, which located between the two bottoms, then draw a horizontal line at this price level.

   6. Pattern confirmation: To consider this formation confirmed, the price should break above the neckline.

   7. Enter the trade: Once the pattern is confirmed, you can open a long position.

   8. Placing stop loss: You should set your stop loss at or just below the second bottom of the pattern. This would be the minimum target.

   9. Profit target: you should measure the distance between the neckline and the bottoms, which represents your minimum target. then apply it upwards starting from the neckline

  10. Trade exit: When the price reaches the minimum target you should exit the trade.

Trading Double bottom

Conclusion

Double top and double bottom patterns are simple but very useful chart patterns. They help traders to determine reversals in the market. If it is a double top, then indicates that there is a bearish reversal is going to occur. And indicates a bullish reversal if it is the double bottom. Moreover, these patterns allow you to set your entry point, stop loss, and profit target.