A trend reversal has begun when a double top or double bottom chart pattern develops.
Let’s look at how to detect and trade these chart patterns.
A double top is a reversal pattern that forms after an extended uptrend.
The “tops” are peaks that occur when the price reaches a level that cannot be broken.
After reaching this level, the price will slightly bounce off it before returning to test it again.
If the price bounces off that level again, you’ve got a DOUBLE TOP!
The chart shows that two peaks or “tops” occurred following a strong run-up.
Take note of how the second top was unable to break the first top’s height.
This is a strong indication that a reversal is imminent because it indicates that the purchasing pressure is nearing its end.
Because we anticipate an uptrend reversal with the double top, we would put our entry order below the neckline.
Looking at the chart, we can see that the price has broken through the neckline and is making a strong move down. Remember that double tops are a trend reversal pattern, so seek for them after a strong advance.
It’s also worth noting that the descent is roughly the same height as the double top structure.
Keep it in mind because it will help you create profit goals.
The double bottom is likewise a trend reversal pattern, but this time we’re seeking to go long rather than short.
These formations occur after long downtrends, when two valleys or “bottoms” have developed.
The chart above shows that after the previous decline, the price developed two valleys since it couldn’t go below a particular level.
Take note of how the second bottom failed to considerably breach the first bottom.
This indicates that the selling pressure is nearing its end and that a reversal is imminent.
The price broke through the neckline and rose sharply.
Notice how the price increased by nearly the same amount as the double bottom formation?
Remember that double bottoms, like double tops, are trend reversal patterns.
You should watch for these following a significant downtrend.
Next Lesson: Trading with the Head and Shoulders Pattern