The double top and double bottom are reversal chart patterns formed when an underlying asset attempts to keep on with the existing trend.
The Double Top and Double Bottom Chart PatternWhen the price of the underlying asset fails to move higher, the prevailing trend experiences a reversal thereby giving way to a new trend.
The Double Bottom ReversalThe double bottom reversal is a bullish reversal formation. It is characterized by two troughs that consecutively follow each other and are divided by a moderate peak. Typically, this pattern is an indication of a long term or intermediate change in price trends. The double trend pattern mainly forms when the resistance point is broken.
As a reversal pattern, the double down formation has very distinct characteristics. These include:
The existence of a previous tend: For a double bottom reversal to form, there has to have been a significant downtrend that has been in existence for a couple of months.
Two troughs characterize the double bottom pattern: The first trough signals the lowest point of the prevailing trend. The peak follows this first trough as a result of an advance volume of trade. The highest point of the peak is often prolonged especially when the trends are reluctant to reverse. This reluctance is an indication of increasing demand though the demand at this point is not adequate to trigger a breakout.
The second trough forms from a declining trend, which results from low trade volume and an encounter with support. The time between the first trough and the formation of the second can be as short as a couple of weeks or as long as several months.
The trade volume is considerably important for the formation of the double bottom reversal. To identify the formation of this pattern, it is important to look out for evidence that buying demand and volume are increasing prior to the formation of the second trough.
The double top pattern, like other reversal formation, continues to form even after trading past the resistance. Only when resistance is broken from the high point between the two troughs does the double top trend come to completion.
Double TopThe double trend occurs at the highest point of an upward trend. It is an indication of a weakening prior trend and a signal of dwindling interest in buying the underlying asset. The trend encounters a reversal when the pattern comes to completion and there is a consequent anticipation that the price of the asset will decline. It is worth bearing in mind that the double top reversal is a bearish formation.
The pattern is distinguishable by two peaks that follow each other consecutively and are separated by a trough. The first peak forms as a result of a new high level in the upward trend. This new high encounters resistance thereby triggering a sell signal. The formation of the trough results from an increasing price level toward the initial resistance. The final part of the pattern results from the decline in value of the underlying asset below the support level, thereby triggering a downtrend.
It is important to note that false double top reversals are common. The best way to identify a double top reversal is that the time between the two peaks should be roughly one month. When there is only a small separation between the peaks, it could be just an indication of resistance and not a long-term indication of sell and buy dynamics.
When trading the double top reversal, it is vital to wait for the support level to be completely broken. To distinguish false support breaks from valid ones, traders can use a time or price benchmark. In this way, a time benchmark will expect the support break to last for at least 3 days while the price filter may require the support break to be about 3% to pass the validation test.
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