Double Tops and Bottoms | Technical Analysis explained

Reading time: 2 minute(s)

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.

  • Double tops and bottoms are one of the most popular price patterns in technical analysis.
  • They are reversal price patterns, which means that they indicate when a trend may reverse.
  • The easiest way to identify a double top/bottom is by looking for a pattern on the chart that represents the letters M (double top) or W (double bottom).
  • They can be used on all time frames and all market assets.

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.

What is a Double Top?

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.

MW1.png

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.

What is a Double Bottom?

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.

MW3.png

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.

FAQ

Double Tops and Double Bottoms have long been popular amongst traders and technical analysis enthusiasts as it’s primarily a strategy that seeks to take advantage of historical price patterns on the basis of a likelihood of history repeating. Yet with all investments strategies, there are risks and its important that traders recognise this and consider risk management as part of their trading strategy.

It depends on your strategy how much risk you are willing to take but certainly one of the popular features of this strategy is that they tend to carry higher reward vs risk ratios. As the trader typically seeks to take advantage of price movements from hitting key support or resistance zones, by placing stop loss orders close to these zones should the strategy fail, it means these trades carry lower risk compared to the potential rewards it might earn should the strategy be deemed successful and prices move in the direction the trader expects.

There are many other popular strategies involving technical analysis which are employed by traders all over the world. Some popular ones include Moving Average Convergence Divergence (MACD),  Support and Resistance as well as Moving Averages.

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

Join over 1 Million investors from around the world

This page uses cookies. Cookies are files stored in your browser and are used by most websites to help personalise your web experience. For more information see our Privacy Policy