The double top and bottom price pattern is one of the most popular reversal price patterns in technical analysis. It’s very popular among traders not only because it’s fairly simple, but because it can be applied to all market segments and time intervals.
The double top price pattern is also known as pattern ‘M’ due to its shape. It’s made up of two tops where the second top should not be higher than the first. A perfect ‘M’ is where both tops are exactly on the same level - but these types of situations are not often found on the market, simply because the market does not form such a formation so rigidly.
This pattern is first formed when the market draws one top after which a corrective movement is initiated, followed by the forming of a second top. The bottom that is found between the two tops forms a significant support level.
When the support level is broken by the market, a sell signal is generated with a higher probability that the market will lose value. The breaking of the support level defines the entry level for the trader.
It’s worth remembering that the double top price pattern, unlike many other technical analysis tools, can also define a target. After the breakout of the support level, the market should decrease by a distance equal to the distance measured from the first top to the bottom, found between the two tops (distance X in the example shown above).
After breaking the support, the market has a higher probability of decreasing by the distance counted from the first top to the support break itself.
The double bottom price pattern is also known as pattern ‘W’ due to its shape. It is made up of two bottoms, where the second bottom should not be lower than the first.
This pattern is first formed when the market draws one bottom after which an increase movement is initiated, followed by the forming of a second bottom. The top that is found between the two bottoms forms a significant resistance level.
When the resistance level is broken by the market, a buy signal is generated with a higher probability that the market will gain in value. The breaking of the resistance level defines the entry level for the trader.
Similarly to the double top, the double bottom price pattern also defines a potential target. After the breakout of the resistance level, the market should gain in value by a distance equal to the distance measured from the first bottom to the top found between the two bottoms (distance X in the example shown above).
Remember that risk management is a key factor in achieving success on the market when trading using technical analysis.
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