What is a Double Top and double bottom?

What is double top?

A double top is a bearish technical chart pattern that comes before a reversal in price movement. A double top roughly resembles the letter “M” and consists of two high points on a price movement chart with a moderate price decline in between.

This pattern occurs when the supply starts overtaking demand on the market. The price then starts to rise again, but in the end, when it becomes clear that it won’t surpass the height of the previous peak, sellers start to dominate the market.

What is double bottom?

A double bottom pattern, on the other hand, usually happens after a downtrend in price movements and signals the beginning of an uptrend. This pattern looks like the letter “W” with its two low points separated by a small increase in between them. A double bottom is frequently used by traders to identify the best time to begin bullish long-term trading.

Both double top and double bottom develop over time. It means that to be completely sure that these patterns precede a reversal in price movement, you should look at daily or weekly price charts. Patterns developed within the span of one day aren’t as accurate. It’s also worth mentioning that these reversal patterns can only be reliable if they occur after an extended uptrend or downtrend.

How to identify a double top pattern on forex charts

Typically, a double top occurs after an uptrend in prices. It starts when a steady price increase gets interrupted by a moderate decline due to some resistance from bears on the market. It doesn’t last long though, and soon the price is picking back up. However, once it reaches the previous peak’s height, the market finally succumbs to pressure from the bears and the price goes down again. Once it falls below the neckline, the double top is considered confirmed.

The difference between a double top and a failed double top

Despite this pattern being a strong indicator for a bearish reversal in price movement, there’s a chance for a double top to fail. A failed double top isn’t followed by a reversal to downtrend, so relying on it can lead to an early exit from a position.

The difference between a double top and a failed double top is that with the latter the price doesn’t breach the neckline and goes up again. So to correctly identify a double top, it is very important to wait for the breach of the neckline.

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2022-11-22 • Updated

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