What are Double Top and Double Bottom Chart Patterns?
Chart patterns are basic yet one of the important tools for the traders. The data fetched from the chart is very helpful to do technical analysis and patterns in the chart can also be used to predict the near future in the stock market. There are many patterns available in the chart but the double top and double bottom chart patterns are most commonly observed by the Traders to analyze the market. These patterns are mostly used to identify trend reversals in the market which helps a lot take decisions because it is also a confirmation pattern for trend reversal. In this blog we will deeply discuss and observe the double top and double bottom chart patterns, and their formation, Importance, and how traders can use them effectively while making their strategy or while making trade decisions.
What is a double top chart pattern in a chart?
A double top chart pattern is a bearish reversal pattern that is seen after a long uptrend. When the price has been rising for a period of time then the double top pattern indicates that it has reached its peak for now and might fail to break the previous high. This pattern indicates that buyers are getting weak and taking exit and there is possible correction towards downwards.
How do Double Top forms?
There are 5 main stages involved in double top formation.
- The Uptrend: This pattern starts with an ongoing uptrend in the price, where the price continuously makes higher highs and higher lows.
- The First Peak: When the price reaches a high which would be the first top then it takes a sudden pull back because some traders have booked the profits. Basically this pullback makes a support level at the lower side but the price again starts going up.
- The Second Peak: After the pullback, the price tries to break the first top. But due to low buying pressure it fails to break the first top. It resulted in the formation of the second top. This top is close to the first top creating a strong resistance.
- Neckline: The level of support formed by the pullback between the both tops is known as the neckline. The neckline plays a critical role in the pattern confirmation.
- The Breakdown: The pattern is confirmed when the price breaks the neckline with heavy volume. Now this breakdown shows that the uptrend has failed and the market will fall until the next reversal in the trend.
Importance of the Double Top
The double top pattern is very important because it shows the change in market sentiment. Traders who observe this pattern can predict the near future and make good profits. It showed that bears are taking up the market when the trend fails to break the first top and the professional trader keeps an eye on it.
The Target Price: Once the chart pattern is confirmed by a neckline break, traders can estimate the potential downward move. The distance between the peaks and the neckline is measured and then projected downward from the point of the neckline breakout. This gives a target price where the price might potentially head.
Trading the Double Top
When trading the double top pattern, the following steps can be taken:
- Entry Point: Traders often enter a short position when the price breaks below the neckline with significant volume. Some conservative traders may wait for a retest of the neckline as resistance before entering.
- Stop Loss: A stop-loss order is typically placed above the second peak to protect against false breakouts. This makes sure that if the whole prediction and assumption fails then the loss should be very limited.
- Profit Target: Profit is measured in the relation with the gap between top and bottom. It is recommended to take the 1:1 and take exit but if you like to trade then you can take the trade till the next reversal by trailing the stop loss.
What is a double bottom pattern in a chart?
In contrast to the double top chart pattern, the double bottom pattern is a bullish or uptrend reversal pattern that forms after a prolonged downtrend. It shows that the price which was falling for some time has reached its low and is now bound to jump back and create a new high.This pattern shows that the bulls have dominated the market and price will most probably rise.
Formation of a Double Bottom
There are mainly 5 points involved in the formation of double bottom
- The Downtrend: The pattern starts with an ongoing downtrend, where the price continuously makes lower lows and lower highs.
- The First Trough: When the price reaches a low which will be considered as a first bottom and then experiences a sharp spike because some traders started buying because they are getting it at a very discounted price. This rebound typically creates a resistance level, but the downtrend keeps going on.
- The Second Trough: After the retest, the price comes down again to break the previous low. But due to the low selling pressure and weak bears it fails to break down the first bottom and shows a sharp spike again which will be considered as a second bottom. This bottom is usually close in value to the first one, creating a support level.
- Neckline: The level of resistance formed between the resistance and bottom is known as the neckline. The neckline plays an important role in pattern confirmation.
- Breakout: The pattern get’s confirmed when the price breaks out above the neckline with heavy volume. This breakout suggests that the downtrend has failed, and an uptrend is likely to follow.
Importance of the Double Bottom
The double bottom chart pattern is very important because it shows a change in market sentiment. Traders who observe this pattern can predict the near future and make good profits. It showed that bears are taking up the market when the trend fails to break the first top and the professional trader keeps an eye on it.
Measuring the Target Price: Similar to the double top pattern, traders can estimate the potential upward move by measuring the distance between the troughs and the neckline and projecting it upward from the neckline breakout. This gives a target price where the price might potentially head.
Trading the Double Bottom
When trading the double bottom pattern, the following steps can be taken:
- Entry Point: Traders often enter a long position when the price breaks above the neckline with significant volume. Some conservative traders may wait for a retest of the neckline as support before entering.
- Stop Loss: A stop-loss order is typically placed below the second trough to protect against false breakouts. This ensures that if the price does not follow through with the anticipated reversal, losses are minimized.
- Profit Target: Profit is measured in the relation with the gap between top and bottom. It is recommended to take the 1:1 and take exit but if you like to trade then you can take the trade till the next reversal by trailing the stop loss.
Conclusion
Double top and double bottom candlestick patterns are very important tools in the view of almost every trader. The data fetched from the chart is very helpful to do technical analysis and patterns in the chart can also be used to predict the near future in the stock market.These patterns are mostly used to identify trend reversals in the market which helps a lot take decisions because it is also a confirmation pattern for trend reversal.While these patterns are powerful, they should not be used in isolation. Traders should take volume, market context, and other technical indicators into confederation to increase the accuracy in their trades.
Does double top double bottom pattern work every time?
Even though the double top and double bottom strategy is very powerful but its not foolproof. You have to see a few things like Volume, Time frame, Confirmation of breakout or breakdown.
What should be the target of the double top and double bottom chart pattern?
Profit is measured in relation to the gap between top and bottom. It is recommended to take the 1:1 and take exit but if you like to trade then you can take the trade till the next reversal by trailing the stop loss.
What should be the stop loss in the Double top and double bottom pattern?
A stop-loss order is typically placed below the second trough to protect against false breakouts in double bottom and placed above the second peak to protect against false breakdowns in Double top.
What is the accuracy of the Double top and double bottom pattern?
Double top and double bottom pattern is a very powerful strategy that works almost everytime. But we need to wait for the confirmation and check the volume before taking any entry.
