Double Top and Double Bottom Formations

The Double Top and Double Bottom formations are among the chart patterns that are effective in predicting trend reversals. Widely used by traders, these patterns can help you understand when a new trend might be starting.

The Double Top formation typically signals the end of an uptrend. It occurs when prices reach the same level twice but fail to break through, resulting in a pullback.

Conversely, the Double Bottom pattern indicates the end of a downtrend and the potential start of an uptrend. This pattern forms when prices hit the same low level twice without breaking below it.

In this article, we will take a detailed look at the Double Top and Double Bottom formations and provide insights on how traders can effectively use these patterns.

What is the Double Top Pattern?

The Double Top pattern is a technical analysis chart that indicates a potential end to an upward trend when prices reach the same level twice but fail to surpass it.

During the formation of the Double Top, prices first reach a peak and then pull back before rising again to form a second peak at a similar level. However, this second peak does not surpass the first one, and prices begin to fall again. For the pattern to be considered complete, the prices must break below the lowest point between the two peaks (the neckline).

The pattern typically signals the beginning of a downward trend. Traders may view the break of the neckline as a signal to take a short position.

What is Double Bottom Pattern?

A chart that shows the end of a downtrend and the possible beginning of an uptrend is called a double bottom pattern. It develops when prices move upward after hitting the same low level twice without going below it.

The initial bottom is reached by prices, after which there is a brief increase. Subsequently, prices decline once more, creating a secondary bottom near the initial low point. The prices start to rise again when the second low fails to surpass the first. When the price breaks above the neckline, the pattern is finished. One could interpret this breakthrough as the start of an upward trend.

Example of Double Top Pattern

In the Double Top pattern, prices essentially reach the same level twice and then pull back. For example, imagine an asset's price reaching $100, then pulling back to $95. Later, it rises again to $100, but fails to break through and starts to decline. In this scenario, if there's a break below the $95 level, it confirms the Double Top pattern.

In the chart below, we can observe this:

• With the price rising, we see the first peak that we expect in a Double Top pattern.
• Following this, the prices start to decline and pull back to a support level.
• After the initial pullback, the prices rise again and reach a level close to the first peak. However, they fail to hold at this level and begin to decline once more.
• The lowest point between the two peaks forms the neckline.
• In the chart, we can see the neckline being broken to the downside. This break indicates that the pattern has completed and a downtrend may have started.

Example of Double Bottom Pattern

In the Double Bottom pattern, prices reach the same low level twice but fail to break below it, leading to an upward trend.

Let’s analyze this with an example: Suppose the price drops to $50, then recovers and rises to $55. After that, the price drops back to $50 again but fails to break below this level and starts to rise again. In this case, if there is a breakout above the $55 level, the Double Bottom pattern is confirmed.

Let's walk through this on a chart:

• Prices decrease during the downtrend and form a dip at a certain level. In the chart, we see that prices hit a low point and then attempt to recover upward.
• After the first dip, prices recover and make an upward move. However, this move is limited, and prices start to fall again.
• Prices drop to the same level for a second time, but this level is not broken. The second dip forms close to or at the same level as the first dip, which is a key characteristic of the Double Bottom pattern.
• After the second dip, prices start to rise again. The highest point between the two dips is considered the neckline of the pattern.
• When prices break above the neckline, the pattern is completed.

How to Identify Double Top or Bottom Formation on a Chart?

Advantages of Double Top & Double Bottom

• They indicate that the current trend is about to end and a new trend may begin.
• The patterns can be clearly identified on the chart.
• They provide strong signals based on past price movements.
• The formations can be effectively used in different markets such as Forex, stocks, and commodities.
• They help in determining a clear entry and exit point.

Limitations of Double Top & Double Bottom

• They can sometimes give false signals.
• The formation may take time to complete, and market conditions may change during this period.
• The accuracy of the formation can be questioned when volume is low.
• The break of the neckline does not always result in a strong trend reversal.
• Double Top and Double Bottom patterns alone may not be sufficient. They may need to be supported by other technical analysis tools and indicators for stronger signals.

FAQs on Double Top and Bottom

Is a double top bullish or bearish?

A double top formation is bearish. The formation typically appears when a price touches a certain resistance level twice and then starts to decline.

What is the psychology behind the double top?

The trading psychology behind a double top formation stems from the belief among investors that the price will not break through the resistance level. This leads to increased selling pressure in the market, indicating a downward trend in prices.

How to find a double bottom target?

To find the target of a double bottom formation, the distance from the bottom of the formation to the neckline is measured, and this distance is then added to the neckline.

What is the difference between a double top and a double bottom?

The difference between a double top and a double bottom formation is that one indicates a bearish trend, while the other indicates a bullish trend. A double top formation suggests that prices have failed to rise and will likely fall, whereas a double bottom formation indicates that prices have stopped falling and are likely to rise.

What confirms a double bottom?

The most important factor confirming a double bottom formation is the price breaking above the neckline. This breakout validates the formation and suggests that an upward trend may begin.