If you want to trade or invest efficiently, you need to know how to read charts. Part of chart reading is analysing the formation of different chart patterns. One such pattern is the double-top and double-bottom pattern. Let’s take a look at what the chart pattern means and how you can use it to trade.
What is a double-top pattern?
A double-top is a bearish reversal technical pattern that forms after the price reaches the same high twice with a moderate decline between the two highs. After making a double-top, if the stock price moves lower and closes below its previous swing low, a downtrend is expected. In certain cases, the two highs may not be at the same level, but are in the same price zone.
A double-top pattern, followed by a break and close below the previous low, gives a higher probability of a downtrend. Waiting for this confirmation is a better way to trade this strategy.
What is a double-bottom pattern?
A double-bottom pattern looks like a “W”. This pattern is formed when a stock or index hits two distinct lows at the same level on separate days. The level to which the price falls twice is considered as the support level.
After hitting the low or declining to the same level a second time, the price rebounds and moves upward. Continuing to move upward, the price breaks the resistance level, signalling bullishness.
The pattern shows a change in the bearish trend and also signals the start of a potential upward trend in a stock or index.
How can traders use the double-top and bottom patterns?
Trading with double-top:
Keep these points in mind when trading with double-top chart patterns.
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Traders should look for two round tops and observe the size of the tops.
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Traders must only enter a short position if the price has broken out of a neckline or support level.
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In this particular case, traders can place the stop loss at the second top of the pattern and can trail as per the risk management process.
Trading with double-bottom:
These points will help you trade better with double-bottom chart patterns.
- Traders should look for two rounding bottoms and consider the size of the bottoms.
- Traders must only take up a long position if the price breaks above the neckline or the resistance level.
- In the double-bottom pattern, the stop loss must be placed at the pattern's second bottom.
What do double-top and double-bottom tell traders?
A double-bottom and double-top chart pattern indicate a potential trend reversal. Before entering a position, market participants should always use the reversal pattern with the other trend following indicator or volume for further confirmation.
Conclusion
While chart patterns such as double-tops and double-bottoms can help you identify trends and determine entry and exit points, traders must also consider other technical signs or confirmations before deciding what to do.
Disclaimer
The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.