How to recognize a double top or double bottom

As one of the more common technical chart patterns it is important for any trader to learn how to recognize the double top and double bottom patterns. Both of these patterns are known as trend reversal patterns. They occur when a trend is coming to an end and price is beginning to move in the opposite direction. Even if the trader isn’t planning on opening positions based on the formation of these patterns, when they occur they can be a trigger to close out open longs or shorts in anticipation of a trend reversal. Below are brief explanations of both the double top and double bottom, which will help you recognize them when they occur.

The Double Top Pattern

A double top is also known as an “M” pattern because the two equal peaks created in the double top pattern look like the letter M. It’s important to note that the double top isn’t complete until price drops below the lowest point in the pattern. The double top is an indication that an uptrend has come to an end and that a downtrend is in the process of forming. As seen above, the double top has two peaks at roughly the same level. Those peaks should both be well-defined and clear, with the second forming after a pullback that creates the lowest point in the formation, which is also known as the confirmation point. It is called this because that’s the point that has to be passed after the second top forms to confirm the formation. It is common for a double top to form on heavy volume. The first top occurs very quickly on heavy volume and then price drops as demand dries up. Price may remain depressed for weeks or even months, but then a second move higher occurs on heavy volume, but not as heavy as in the first peak. Price is unable to rise above the previous peak and drops back once more. At this point the bulls are exhausted and there is no more buying power. With the demand for the stock gone it continues falling, switching into a downtrend, with volume increasing as price breaks below the confirmation point.

The Double Bottom Pattern

A double bottom pattern is also known as a “W” pattern and is the opposite of the double top, occurring when price makes two clearly defined and nearly equal lows on a chart. A double bottom indicates a reversal of trend, this time switching from a downtrend to an uptrend, but it is only confirmed once price rises beyond the highest price in the double bottom pattern, known as the confirmation point. You can see the clearly defined lows in the image above that demonstrate a double bottom. Prices drop to a support level on heavy volume, rally and fall as volume drops off. Price then drops back to the support level on increased volume. After failing to break the support price moves higher, with volume once again increasing as price moves above the confirmation point and a new uptrend begins.