Double top and bottom chart patterns are used to predict bottom and top reversals in futures markets. Identifying this pattern in a trading chart could indicate the beginning or end of a market trend. By showing both the ‘bottoming out’ and ‘topping out’ of a trend, double top and bottom chart patterns can be helpful in finding a potential trade setup.
When charting, technical analysis based traders often take the phrase ‘history repeats itself’ to heart. Backtesting a particular financial instrument for this pattern may enable you to see what market trends led to other double top and bottom patterns. In turn, this could help you identify the environment leading to the set-up of a major trend reversal.
Double Top Chart Pattern
A double top chart or ‘W’ pattern can signal both that a market ceiling is in and a significant price decrease could occur. As shown below, the double top chart pattern begins with the first top, then forms the second top, that appears before the market decreases.
Double Bottom Chart Pattern
A double bottom or ‘M’ chart pattern can signal both that a market floor is in and a significant price increase could occur. As shown above, the double bottom chart pattern begins with the first bottom, then forms the second bottom, that appears before the market increases.
Double Top and Bottom Patterns are Identified: What Now?
When a double top or bottom is identified, a next step could be to decide on a buy or sell trade entry or exit point. A breakout reversal is a common technical indicator used to determine when a market is about to begin a new trend. This occurs after the second top or bottom of the chart pattern is completed and breaches the resistance or support level, as shown in the chart above.
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