Double Top or Bottoms
A double top is a potential reversal pattern that is formed after there is an extended upwards price movement. The tops are peaks which are formed when the price hits a certain level of resistance that cannot be broken at this time.
After hitting the resistance, the price will reverse to the neckline however, it will then return back to resistance test the level again (2nd top). If the price again retraces off of that level, it forms a Double Top Pattern.
In the chart above you can see that two tops were formed after a strong move up.
Notice how the second top was not able to break the high of the first top. This is a strong indication that a potential reversal is going to occur. The tops indicate that the buying pressure (Bulls) is coming to an end.
With the double top, we would potentially place our entry order just below the neckline because we are anticipating a reversal of the uptrend.
Looking at the chart you can see that the price breaks the neckline and moves down. Double tops are a potential trend reversal formation so you’ll want to look for these after a strong uptrend.
Notice that the drop is approximately the same height as the double top formation (it can continue further). On the safe side you can aim for this target or asses if you believe the trend will continue down. Use stop losses and take profits wisely.
The double bottom is also a potential trend reversal formation, but this time we are looking to go long instead of short. These formations occur after extended downtrends when two bottoms have been formed.
You can see from the chart above that after the previous downtrend, the price formed two dips because it was unable to go below a certain level.
Observe how the second bottom wasn’t able to significantly break the first bottom. This is a sign that the selling pressure is ending, and that a reversal is about to occur.
The price broke the neckline and the trend reversed.
The price jumped by almost the same height as that of the double bottom formation.Remember, just like double tops, double bottoms are also trend reversal formations.