Double Top and Double Bottom: Spotting Reversal Signals Early
Trading charts will print many different signals, with plenty of false alarms to keep traders on the edge. Finding and confirming these signals can be key to getting a good trade setup or exiting a poor one.
The double top pattern and the double bottom pattern are two of the most recognisable signals in Technical Analysis. They’re easy to spot because the double top looks like an M, while the double bottom looks like a W. They stand for something relatively simple: a trend running out and set up for a reversal in price action.
Catching one of them gives traders the option of setting up a trade near a reversal point. Depending on the nature of that reversal, it could set up a slow, long-term climb to profit or a faster, more explosive breakout. Nevertheless, traders should always wait for confirmation before committing.
Here’s everything traders like you should know about double tops and double bottoms.
What Are Double Top and Double Bottom Chart Patterns?
The names double top and double bottom come from the fact that each one has two peaks or troughs. As mentioned, the two peaks of the double top pattern form an M while the two troughs of the double bottom form a W. Note that not every double top or bottom will make a clean, proportional M/W with peaks reaching the same height.
When you see these, you are seeing price action tap against existing resistance or support twice. This usually happens at the end of a movement trend and, once the signal prints, that trend reverses.
What follows is a rise or fall to the neckline. The neckline is established by where the troughs (if M) or peaks (if W) settle. It establishes a line with the double top M or the double bottom W emerging from it.
Once identified, traders should look to confirm the signal. Leaping into a false reversal signal can be a costly mistake, which is why traders don’t take the double top or double bottom chart pattern at its word. Instead, they look for accompanying signals, like bullish/bearish candlestick patterns.
How Traders Identify Double Top and Double Bottom Reversal Patterns
Besides eyeballing it, traders look for three things when initially identifying double tops or double bottoms.
For double top traders, it would be:
- After an uptrend with higher highs and higher lows.
- Two highs at a similar (not necessarily identical) price level, with a trough between.
- Price declines once the pattern has formed.
Naturally, it reverses for the double bottom chart pattern:
- After a downtrend with lower lows and lower highs.
- Two lows at a similar price level, a peak between them.
- Price reverses upwards once the signal prints.
Traders tend to notice these patterns as the second peak/trough is forming. That second movement should be within a few percent of the original peak/trough, with diminishing volume. Like the first, it should be a sharp bounce off resistance/support, not a rounding formation.
Finally, to confirm, traders look to that important neckline. They look to see if price action breaks above or below it, indicating a successful reversal. When volume, reversal candlestick patterns and a neckline break all coincide, a double top/bottom is highly likely.
Confirmation takes patience, to see how the pattern plays out. Without confirmation, traders risk buying into a bull or bear trap.
Double Bottom and Double Top Trading Approaches
Let’s go through approaches to a double top trade and a double bottom trade.
When trading double top, your goal is either to short using derivatives or eject shares from a stocks trading position you held through the uptrend. After the signal prints, short entrants typically come in on the candle(s) that break and conclude below the low point of the M. Conservative traders may wait longer to get in at new resistance.
No matter where they enter, traders with good risk management habits would place a stop-loss order just above the double top pattern. Patterns are messy and don’t work every time, so risk management is still important.
As for the profit target, traders can take the distance between the peaks and the neckline to get a figure. By subtracting that figure from the price at neckline, you get a rough estimate of how far the price may fall.
Double bottom trading is very similar but flipped. It becomes a more typical trade where you try to buy at new support. That new support would be where a green candle breaks and closes above prior resistance, the neckline above the W. Here, the stop-loss would go beneath the second trough.
To get a profit target, measure the distance between the neckline and the trough, then add it to the neckline price. A good understanding of support and resistance levels.
Confirming a Double Top / Double Bottom with Reversal Patterns
As mentioned, confirmation is the final step before you take a trade on reversal patterns. Since patterns like double top and double bottom indicate breakouts, there’s a risk it’ll become a ‘fakeout’ instead. Confirmation demands traders watch and wait, to see how the price moves.
Besides patience, further signals can help evidence an incoming reversal. We covered two already: low second-movement volume and reversal candlestick patterns. Further confluence indicators are historical support/resistance barriers and moving averages.
If a double top forms at a historical ceiling, it’s much more likely that it’s genuine. If one appears in an area with no resistance, it may be a fake. Take double top and double bottom chart patterns more seriously when they happen at resistance or support.
Likewise, watching for a cross on the moving average adds more evidence to the move. Many traders will see a double top forming but wait for the price to move below moving average. If the price is still above (for tops) or below (for bottoms) the moving average, then exercise caution.
Double Top and Double Bottom FAQs for Beginners
Can The Double Top and Double Bottom Pattern Appear on All Timeframes?
Yes, these reversal patterns can appear on all timeframes. It’s possible to catch short-term double top patterns and set up for long-term double bottom trading, all on the same chart. While each pattern comes with uncertainty, short-term indicators fail more often than long-term ones that take weeks to play out.
How Reliable Is the Double Top / Double Bottom Pattern?
The double top / double bottom can be quite reliable, but that comes with a big caveat. They must be confirmed first, otherwise the pattern hasn’t formed. Many traders fall into this trap, entering a position before the top/bottom has appeared, to then find it was a fakeout.
Why Is the Neckline So Important in Double Top Trading?
The neckline is a horizontal line drawn between the bottom points of the M (or the top of the W in double bottom trading). It forms a local ceiling/floor that, when crossed, indicates the double top / bottom was a true reversal pattern.
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