In today’s post we will discuss the Double Top and Double Bottom chart patterns.
These are reversal patterns that indicate a reversal of a the existing trend.
A Double Top is found in an Uptrend signalling a new downtrend.
A Double Bottom is found in a Downtrend signalling a new uptrend
Chart patterns are great tools to be used because they are real time indicators rather than lagging indicators commonly used by traders, such as the Bollinger Bands or MACD.
The indication on these patterns is known as the Break Out. This is when the price “breaks” through the neckline which also confirms the pattern.
There are two Entry strategies usually used for these patterns. The first is a more aggressive entry once the second peak or valley is formed. The second is a more conservative approach initiating the trade once the indication is given for the Break Out of the neckline. Once the price has “Broken Out”, it is the signal that the price trend will continue and poses as a possible entry point of the trade.
The Double Top is formed in an uptrend starting with the peak, it then pulls back falling down to the neckline (a support). The price then tries a second time to rise up mostly around the price of the first peak however falls again down to the neckline breaking it confirming the new trend.
On the initial peak, demand is maximized causing the supply to increase bringing the price lower. It then increases again by the buyers bringing to its second peak of demand causing the supply to increase again finally bringing demand and the price down.
The Double Bottom is formed in an existing downtrend starting with a valley, it then rises up to the neckline (a resistance). The price then falls a second time around the price of the first valley however rises again up to the neckline breaking it confirming the new trend.
On the initial valley, demand is created causing the supply to decrease bringing the price higher. Demand then decreases again by the sellers bringing it to the second valley of increased supply. When there is increased supply, meaning a low price, it brings demand up followed by the price creating the new trend.
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