Double Top and Double Bottom Pattern are reversal chart patterns that take a much longer time to be formed. The double top pattern resembles an ‘M-shape’ and showcases a bearish reversal pattern whereas the double bottom pattern resembles a ‘W-shape’ pattern that indicates a bullish reversal. These patterns are formed after the consecutive round tops and bottoms. 

So, let’s take a look at how these patterns change and how to trade with them.

Double Top and Double Bottom - Table of Contents

What is a Double Top Pattern?

A double-top pattern highlights a bearish reversal chart pattern that forms in an uptrend. This pattern is formed with two peaks in a support level that is known as a neckline. The first peak forms with a strong uptrend and then traces back to the neckline. Once it comes back to the neckline, the price returns back to bullish and then rises back to form the second peak. So, when the price breaks through the neckline then the reversal of the bearish trend is confirmed. 

What is a Double Bottom Pattern?

A double bottom pattern is a bullish reversal chart pattern that forms post the downtrend. The pattern formed with two lows that is below the resistance level that is also considered a neckline. The first low forms after a strong downward trend and the price retraces back. After returning to the neckline, the price turns bearish and continues to fall to the second low. The formation of this pattern is complete when the price moves back to the neckline post the formation of the second low. When the pricing breaks through the resistance level or the neckline, then the bullish trending reversal gets confirmed and traders enter a long term holding.

[ Check out The Difference Between Bullish and Bearish Market ]

Understanding Double Top and Bottom Patterns

1. Double Top Patterns:

A double top pattern forms from two consecutive rounding tops. The first top forms with an upside-down U pattern, and is an indicator of a bearish reversal that occurs post an extended bullish market. Doable tops also have similar inferences. When a double top occurs, the second rounded top is slightly lower than the initial rounded top peak. This indicates resistance and exhaustion. Double tops are rare occurrences with the formation that indicates that investors are looking to gain final profits from the bullish trend. Double tops generally lead to a bearish reversal where traders can gain profits from selling stocks when it is downward trending. 

2. Double Bottom:

A double bottom pattern is just the opposite of double tops. This pattern is formed post a single rounding bottom pattern that is the initial sign of a potential reversal. The rounding bottom pattern occurs typically at the end of an extended bearish trend. This formation is made from two consecutive rounding bottoms that show cases that investors can follow the security to capitalize on the last push that is lower than the support level. A double bottom top normally indicates a bullish reversal that offers an opportunity for investors to gain profits from the bullish rally. Post a double bottom, common trading strategies include long positions that provide profits from a rising security cost.

What are the Limitations of Double Tops and Bottoms Patterns? 

The Double Top and Double Bottom Pattern formations are very effective when it is identified correctly. But, it can be extremely detrimental when not interpreted properly. So, you need to be patient before jumping into it. 

For instance, there is a major difference between a double top and one that fails. A real double top is an extremely bearish pattern that leads to a sharp decline in assets or stocks. But you need to be patient and identify the support levels to confirm the double top’s identity. Based on the double top solely on the formation of two consecutive peaks that leads to a false reading and causes an early exit.

What Do Double Tops and Double Bottoms Tell Traders?

A Double Top and Double Bottom Pattern tells traders about trend reversals. But, in either case the reversal is not confirmed then the prevailing trend is formed in the second low or second peak before reversing in the opposite direction to the trend. 

With other technical charts and indicators, the double tap and double bottom patterns do not signify trend indicators. Due to this traders need to use these patterns along with others to confirm the trend before they open a position.

[ Check out The Types Candlestick Chart Patterns ]

How To Trade Double Tops and Double Bottoms Patterns?

There are two specific ways that you can trade double tops and double bottom patterns, you can open a short position on a double top and a long position in the double bottom. Before you do any of these, it is important to check the signals with other indicators like the parabolic SAR or Relative Strength Index (RSI) - both indicate momentums.

When you open an account you can use either options to trade forex. You can also use double. When you identify a double top pattern, you can then open a short position post the second peak, and with the double bottom option, you can open a long position post the second low. 

To trade in a double top or double bottom you can use the following: 

• Research the forex options you can trade.
• Identify the pair option you want to take a stand on.
• Understand how to identify the double tops and double bottoms.
• Start trading with your account.

1. Trading With Double Top Pattern With Example

To understand a double top trade let’s take an example. So, when you see, the trend prior to the first peak is bullish, and indicates a market that increases in value. But, the upward trend stops at the first peak and moves down to the neckline. It is at this point that when the momentum lowers the pattern becomes void. But it bounced off the neckline and resumed a bullish trend. This continues for a short period before the asset again loses momentum. This time the trend broke through the neckline which signifies a permanent reversal in the overall momentum of the asset value.

To make a profit, the investor needs to open a short position at the height of the second peak. Then they need to exit the position at the early sign where the trend again turns bullish. Investors can also use stops to protect themselves from sustaining a loss when the market rises post the second peak.

2. Trading With Double Bottom Pattern With Example

To understand the double bottom trade concept, take a look at the price graph. It showcases the trend prior to which the double bottom pattern is bearish - which indicates the market value is falling. In this case, the downward momentum stops at the first drop and moves back to the neckline.

It is at this point that the momentum continues higher then the pattern will become void. Instead, it bounces off the neckline and resumes a bearish trend before it hits the first low. The momentum stops eventually, and the second low gets formed. Here the trend is a permanent reversal that continues up into the level of resistance into the neckline. 

If an investor wants to make a profit in this case, then they need to open a long position in the second low. They also need to exit their long position at the early sign of reversal where it turns bearish. Just like the double top pattern, traders need to use stops when trading in this pattern. This is done to protect themselves from incurring losses in case the market falls post the second low. 

Conclusion

Now that you know the difference between the Double Top and Double Bottom Pattern as investors you need to check the volume to confirm the reversal before investing and also use stops if you see the market is going down. Follow the market trend to know if the latest double top or bottom pattern will continue, or whether you should pull out before losing money.