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250 views8 pages

Double Top and Bottom Patterns Defined, Plus How To Use Them

Uploaded by

Sagir Musa Sani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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TRADE

TECHNICAL ANALYSIS TECHNICAL ANALYSIS BASIC EDUCATION

Double Top and Bottom Patterns


Defined, Plus How to Use Them
By JAMES CHEN Updated June 19, 2024
Reviewed by CHARLES POTTERS

Fact checked by VIKKI VELASQUEZ

Part of the Series


Guide to Technical Analysis

Investopedia / Madelyn Goodnight

What Is Double Top and Bottom?


Double top and bottom patterns are chart patterns that occur when the
underlying investment moves in a similar pattern to the letter "W" (double
bottom) or "M" (double top). Double top and bottom analysis is used in
technical analysis to explain movements in a security or other investment, and
can be used as part of a trading strategy to exploit recurring patterns.
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KEY TAKEAWAYS
Double tops and bottoms are important technical analysis patterns
used by traders.
A double top has an 'M' shape and indicates a bearish reversal in trend.
A double bottom has a 'W' shape and is a signal for a bullish price
movement.

Understanding Double Tops and Bottoms


Double top and bottom patterns typically evolve over a longer period of time,
and do not always present an ideal visual of a pattern because the shifts in
prices don't necessarily resemble a clear "M" or "W". When reviewing the chart
pattern, it is important for investors to note that the peaks and troughs do not
have to reach the same points in order for the "M" or "W" pattern to appear.

Double top and bottom patterns are formed from consecutive rounding tops
and bottoms. These patterns are often used in conjunction with other indicators
since rounding patterns in general can easily lead to fakeouts or mistaking
reversal trends.
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Double Top Pattern


A double top pattern is formed from two consecutive rounding tops. The first
rounding top forms an upside-down U pattern. Rounding tops can often be an
indicator for a bearish reversal as they often occur after an extended bullish
rally. Double tops will have similar inferences. If a double top occurs, the
second rounded top will usually be slightly below the first rounded tops peak
indicating resistance and exhaustion. Double tops can be rare occurrences with
their formation often indicating that investors are seeking to obtain final profits
from a bullish trend. Double tops often lead to a bearish reversal in which
traders can profit from selling the stock on a downtrend. [1]

Image 1
Image by Sabrina Jiang © Investopedia 2021

Double Bottom Pattern


Double bottom patterns are essentially the opposite of double top patterns.
Results from this pattern have the opposite inferences. A double bottom is
formed following a single rounding bottom pattern which can also be the first
sign of a potential reversal. Rounding bottom patterns will typically occur at the
end of an extended bearish trend. The double bottom formation constructed
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from two consecutive rounding bottoms can also infer that investors are
following the security to capitalize on its last push lower toward a support level.
A double bottom will typically indicate a bullish reversal which provides an
opportunity for investors to obtain profits from a bullish rally. [2] After a double
bottom, common trading strategies include long positions that will profit from a
rising security price.

Double Bottom Example VOD


Double Bottom Example. StockCharts.com

Limitations of Double Tops and Bottoms


Double top and bottom formations are highly effective when identified
correctly. However, they can be extremely detrimental when they are
interpreted incorrectly. Therefore, one must be extremely careful and patient
before jumping to conclusions.

For instance, there is a significant difference between a double top and one that
has failed. A real double top is an extremely bearish technical pattern which can
lead to an extremely sharp decline in a stock or asset. However, it is essential to
be patient and identify the critical support level to confirm a double top's
identity. Basing a double top solely on the formation of two consecutive peaks
could lead to a false reading and cause an early exit from a position.
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Part of the Series


Guide to Technical Analysis

Key Technical Analysis Concepts


Getting Started with Technical Analysis TRADE

Essential Technical Analysis Strategies

Technical Analysis Patterns

1 Introduction to Technical Analysis Price Patterns

2 5 Most Powerful Candlestick Patterns

3 Continuation Pattern

4 Trendline

5 Price Channel

6 Channeling: Charting a Path to Success

7 Playing the Gap

8 Double Tops and Bottoms


CURRENT ARTICLE

9 Triple Tops and Bottoms


NEXT UP

10 Head And Shoulders Pattern

11 How to Trade the Head and Shoulders Pattern

12 Flag

13 Pennant

14 Triangle

15 Wedge

16 Cup and Handle Pattern

17 Trading Fibonacci Retracements

18 Elliott Wave Theory

19 Trader's Guide to Using Fractals

Technical Analysis Indicators


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