Double Top & Double Bottom

Double Tops and Double Bottoms are reversal patterns. They depict an asset's attempt to continue moving in the existing direction by either moving higher or falling lower. Double Tops and Double Bottoms form after two failed attempts and indicate the beginning of a new trend.

Double Top Chart

A Double Top resembles an "M" and can be traced at the peaks of an upward trend. It indicates that the upward trend is weakening and will soon change direction. As the chart shows, once an asset's price reaches a specific level it bounces off slightly only to test that level again before it begins to fall.

Double Tops basically show that the buyers are losing interest. Smart traders which detect a Double Top pattern will go short by placing their entry order after the price bounces off the second top since they are anticipating the price to fall.

Double Top Chart

A Double Bottom resembles a "W" and forms after an extended downtrend. Contrary to the Double Top, a Double Bottom pattern indicates that it is the downward trend that is weakening, with a reversal soon to follow. As you can see from the chart, the asset's price was unable to go below a certain level and after testing that level twice, it bounced back and continued moving upwards.

Double Bottoms show that selling pressure is rapidly weakening. Traders will take advantage of a Double Bottom pattern by going long after the price bounces back from the second bottom, expecting that the price will soon rise.

Did you know?

U.S. President Richard Nixon is credited with enabling a free-floating currency system after ending the Bretton Woods Accord.

Word of the day
"Fundamental Analysis (FA)" - A method of market analysis that concentrates on external factors such as the economic, geopolitical and social climates that affect or could affect the price of an asset. Fundamental analysis is largely based on the belief that assets are always either overpriced or under-priced, and constantly in effort to reach their true value.
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