When a double top or double bottom chart pattern appears, a trend reversal has begun.
Let’s learn how to identify these chart patterns and trade them.
Double Top
A double top is a reversal pattern that is formed after there is an extended move up. The “tops” are peaks that are formed when the price hits a certain level that can’t be broken.
After hitting this level, the price will bounce off it slightly, but then return back to test the level again. If the price bounces off of that level again, then you have a DOUBLE top!
This is a strong sign that a reversal is going to occur because it is telling us that the buying pressure is just about finished.
With the double top, we would place our entry order below the neckline because we are anticipating a reversal of the uptrend.
Wow! We must be psychic or something because we always seem to be right!
Looking at the chart you can see that the price breaks the neckline and makes a nice move down.
DOUBLE BOTTOM
The double bottom is also a trend reversal formation, but this time we are looking to go long instead of short.
These formations occur after extended downtrends when two valleys or “bottoms” have been formed.
You can see from the chart above that after the previous downtrend, the price formed two valleys because it wasn’t able to go below a certain level.
Notice how the second bottom wasn’t able to significantly break the first bottom.
This is a sign that the selling pressure is about finished, and that a reversal is about to occur
Will you look at that!