Double Top And Double Bottom Chart Patterns
A repeated formation of bottoms or tops around the same price levels are typically considered to be among the most significant chart pattern formations. The double top and double bottom chart patterns are considered to be two of the most powerful formations technical analysts use to forecast reversals. The names are pretty much self explanatory; these patterns show a forex currency pair’s attempt to continue with the existing trend or reverse it – dependant on the placement.
This chart pattern, when formed, will often look to be what appears like a “W” for a double bottom pattern or an “M” for a double top variant. This gives the trader an idea that something is happening at this price level and signifies supply or demand. However, it won’t show us what exactly, or whether or not traders should buy or sell – it does tell us that the level has significance for the currency pair in question.
Double Top Chart Pattern
Double top patterns give forex traders an insight into the opposing forces of buyers and sellers.
A double-top chart pattern is encountered at the highs of an ascending trend. This pattern is showing the chart analyst that the preceding ascending momentum is weakening and that the bulls are backing off. When this chart pattern is confirmed technical analysts see a reversal of the trend as imminent for a certain period of time and the forex currency pair therefore has potential to move lower.
The pattern begins to form as a new high is made during an up trend then some form of resistance pushes the price down to a level of support. Price then starts to move back up to the aforementioned resistance level encountered in the last rally and subsequently drops off to the support level again. The pattern is realised in its entirety when the forex pair declines below the support level that had stopped each previous drop.
Double Bottom Chart Pattern
This is the inverse/opposite chart pattern of the double top as it signals a reversal of the downtrend into an uptrend. This pattern has a "W" shape to it. All of the above points relating to double top chart patterns can be used for double bottom analysis/identification.
Many technical analysis traders believe that the price objective should be measured by taking the distance between the high and low levels of the double top range and projecting from the breakout point. My experience is that many times these price projections are hit but also many times they are not. I prefer to look at the big picture and look for obvious confluent areas to exit.
Other points of note relating to trading double top / double bottom patterns
- A break of a double top to the upside and double bottom to the downside can also be a high momentum breakout play as order flow can build around these areas. I consider this kind of setup to be trading a failure of the pattern. The order flow is often is often found as speculative players look to enter or exit around clearly defined support and resistance levels. The more obvious a level is the more chance that others will have seen it.