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How Do Double Top and Double Bottom Chart Patterns Work? | Beginner’s Guide To The Stock Market | Module 12

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  • How Do Double Top and Double Bottom Chart Patterns Work? | Beginner’s Guide To The Stock Market | Module 12
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How Do Double Top and Double Bottom Chart Patterns Work? | Beginner’s Guide To The Stock Market | Module 12

Double Top and Double Bottom Chart Patterns are some of the most important patterns in technical analysis. In the previous blog of Beginner’s Guide To The Stock Market series, we have discussed the 8 Important Chart Patterns. In today’s lesson, I am going to tell you in detail about Double Top And Double Bottom Chart Patterns Work and also, how you can trade them when these types of patterns are formed.

  • Double Top Chart Pattern

1.) How does the Double Top Chart Pattern form?

Double Top patterns occur when prices fail to make new highs compared to previous high. These patterns are quite reliable patterns to trade as they will often give you the profit. Also, failure of these patterns results in the triple top or multiple top patterns, which are even stronger than the double top pattern. Double tops usually indicate the end of a bullish market depending upon the width of the top formation. Volumes at the first swing may be greater as compared to volume at the second swing. In addition to this, the volume increases hugely at the breakdown from the neckline. If the volume is weaker at the neckline, then it may indicate a potential triple or multiple top patterns.

2.) How to identify the Double Top Pattern?

    • Double Top pattern is one of the most frequently occurring pattern and it can be identified quite easily. You can identify double top patterns based on the following 3 points –
    1. First Top – This is the point where price takes rejection for the first time from upper levels. (You can mark this point by the line)
    2. Neckline Formation – This is the point at which price takes support from the lower levels which form the swing low.
    3. Second Top – This is the point where price takes rejection for the second time from the same level which confirms the double top pattern. (After this, trade can be initiated after the breakdown from the neckline.)

    Double Top Pattern

    3.) How to trade Double Top Patterns?

    A Double Top Pattern indicates the end of the bull run and a potential short trade. A double top pattern confirmation occurs at the breakdown from the neckline with larger volumes. Short trade can be initiated below the swing low at the neckline.

    The double top pattern can give us good risk-to-reward ratios to trade, and hence they are one of the most important patterns to trade. Generally, for trading double top patterns, the target can be set as the distance between the top of the pattern to the neckline from the trade entry.

    As discussed earlier, breakdown from double top patterns can also fail to form triple or multiple top patterns. Generally, failure of double top patterns occurs when price reverses and trades at the middle of the double top pattern.

    • Double Bottom Chart Pattern

    1. How does the Double Bottom Chart Pattern form?

     The Double Bottom Pattern is exactly the opposite of the double top pattern. Double bottom patterns occur when prices fail to make lower lows as compared to previous lows. These patterns are formed at the bottom of the downtrend, and these are considered quite reliable patterns which offer a good risk to reward ratios. Also, failure of these patterns results in the triple bottom or multiple bottom patterns that are even stronger than the double bottom pattern. The double bottom usually indicates the end of a bearish market depending upon the width of the top formation. Similar to double top patterns, volumes increase sharply at the breakout from the trendline. If the volume is weaker at the neckline, then it may indicate a potential triple or multiple bottom patterns.

    2.) How to identify the Double Bottom Chart Pattern?

    Like Double bottom patterns these patterns also frequently occur in the market, and you can spot them very easily. The double bottom pattern can be identified based on the following 3 points –

    1. First Bottom – This is the point where price takes the support for the first time, and the first bottom is formed. (You can mark this point by the line)
    2. Neckline Formation – This is the point at which price takes resistance from the upper levels which forms the swing low.
    3. Second Bottom – This is the point where price takes the support for the second time from the same level which confirms the double bottom pattern. (After this, trade can be initiated after the breakout from the )

    Double Bottom Pattern

    3) How to trade Double Bottom Patterns?

    A Double Bottom indicates the end of bearish markets and potential long trade. A double bottom pattern confirmation occurs at the breakout from the neckline with larger volumes. Long trade can be initiated above the swing high at the neckline.

    The double bottom pattern can give us good risk-to-reward ratios to trade and hence they are one of the most important patterns. Generally, for trading double bottom patterns, the target can be set as the distance between the bottom of the pattern to the neckline from the trade entry. This pattern is generally formed at the end of the downtrend indicating a new uptrend after the breakout from the neckline.

    Breakouts from double bottom patterns can also fail to form triple or multiple bottom patterns. Generally, failure of double bottom patterns occurs when price reverses and trades at the middle of the double bottom pattern.

    I hope that through this article, you were able to understand how double top patterns and double-bottom patterns form and how you should trade them with proper stop-loss and targets. If you are interested in learning more about chart patterns, then you can definitely check out my previous blog on 8 Chart Patterns in the Technical Analysis that Every Trader Should Know | Beginner’s Guide To The Stock Market | Module 11. Also, if you have any queries regarding this topic, then please post them in the comment section.

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