Double Tops and Bottoms
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WHAT TO LOOK FOR
The Double Top and Double Bottom are actually two separate formations which are both considered to be reversal patterns. The Double Top is a bearish reversal while the Double Bottom is a bullish reversal. In the case of a Double Top, the pattern is characterized by two consecutive peaks at roughly the same price point. The peaks are separated by a moderate trough. The Double Bottom formation is essentially the exact opposite. It is characterized by two consecutive troughs at roughly the same price point. The troughs are separated by a moderate peak.
In a Double Top setup, when price comes back down from the second peak and breaks through the support line created by the lowest point of the trough, a reversal of the previous trend is signaled. Of course in a Double Bottom setup, once price rises after the second trough and breaks through resistance created by the center peak's formation, a reversal is considered to be at hand.
Key aspects of Double Tops and Bottoms Patterns
- Trend: Because Double Tops and Double Bottoms are reversal patterns, they must be preceded by a well defined trend in order to be considered valid. A Double Top would be preceded by a bullish trend, while a Double Bottom will be preceded by a bearish trend.
- First Peak/Trough: The first peak is simply the high point of the current bullish trend in a Double Top. The first trough would be the low point of the current bearish trend.
- Trough/Peak: The trough is formed by a subsequent drop in price after the first peak. This drop is typically a 10-20% drop. Likewise, in a Double Bottom, the peak is a 10-20% rise in price after the first trough.
- Second Peak/Trough: The second peak is formed when prices rises after the low of the trough. Price will rise and test resistance which is created by the high of the first peak. With a Double Bottom, the second trough is formed when price falls after the high of the center peak. Price will fall and test support which is created by the low point of the first trough.
- Break: When price bounces off of the second peak it is not necessarily a sign that the formation is complete. Price must fall below the lowest point of the trough. The bottom of the trough now signifies a key support level. In the Double Bottom formation, price must break through the resistance created by the high of the center peak. The high of the peak now signifies a level of resistance.
- Support and Resistance: In the Double Top, once price falls and breaks through the support of the trough and the formation is confirmed, that support now becomes a level of resistance. With the Double Bottom, the resistance created by the middle peak, now becomes a level of support.