Understanding Double Top and Double Bottom Technical Analysis
Author: James Clark
Do you want to understand the difference between double top and double bottom technical analysis? We share everything that you should know about it right here.
The double top and double bottom pattern is a trading chart pattern that shows when the investment has moved in a pattern that resembles the letter “M” for the double top and the letter “W” for the double bottom. Traders use double top and double bottom patterns for technical analysis to understand the movements of their investment or security. It is also commonly used as a trading strategy to take advantage of recurring patterns.
Understanding Double Top and Double Bottom Patterns
The double top and double bottom trading patterns tend to evolve over long periods and don’t necessarily represent the ideal visual due to the shift in prices. They won’t always be in a clear “W” or “M” shape. When investors review the trading chart patterns, they must understand that the toughs and the peaks don’t have to reach similar points for the “W” or “M” pattern to show.
When there are consecutive rounding bottoms and tops, it results in double top and double bottom patterns. The patterns are generally used together with other target indicators as the rounding patterns can easily result in a fakeout or making a mistake with reversal trends.
• The Double Top Pattern
The double top pattern forms when there are two rounding tops consecutively show up. The first rounding top will form the pattern of an upside-down U. These rounding tops can indicate a bearish reversal because they show after there has been a long-term bullish rally. The second rounded top will be slightly lower below the first when a double top shows.
The double top pattern is rare and often indicates that investors want to obtain profits from the bullish trend. The double top pattern can result in a bearish reversal as traders can use it to profit by selling their stocks on a downward trend.
• The Double Bottom Pattern
The double bottom pattern is the complete opposite of a double top pattern. The double bottom pattern is formed after one rounding bottom pattern, which could be a sign of a reversal occurring. The rounding bottom pattern will show when an extended bearish trend is nearing its end. The formation of a double bottom pattern from two rounding bottoms consecutively can show that investors want to follow security and capitalize on it.
The double bottom pattern generally indicates a bullish reversal as it offers investors an opportunity to acquire profits after a bullish rally. Common trading strategies after the double bottom pattern including holding long positions, which will profit from a rise in the security price.
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