The following patterns, Double Top Reversal and Double Bottom Reversal, are explained here in broader terms to appeal to novice investors.
Double Tops and Double Bottoms mark intermediate or long-term trend reversals or continuations on weekly and daily charts. Be mindful that these patterns are not that reliable on intraday charts. Again, until key resistance is broken, a reversal or continuation breakout cannot be confirmed. In any case, always avoid buying into low-volume breakouts.
Double Top Reversal
The Double Top reversal pattern may form because the sentiment that was formerly producing the uptrend is now possibly shifting and buying pressure is not strong enough to produce a higher swing high to keep the uptrend intact.
This is an easy-to-recognize pattern that looks like the letter M. The pattern is a reliable reversal pattern that can be used to enter a bearish position after a bullish trend, especially when the next swing high is even lower.
It consists of 2 tops at nearly the same level with a valley in between, which creates the neckline. The second top does not break the level of the first top, so the price retested this level and tried to make a higher high, but failed. Price breaking the neckline and closing below it would complete the pattern.
Traders look for additional confirmation and aggressive traders may enter a bearish position from the second top. The target can be estimated by measuring the height of the pattern and projecting this downwards from the neckline. Common stop levels are just above the neckline, halfway between the neckline and the tops or above the tops.
Much like a Double Top pattern, a Triple Top pattern is otherwise a longer term reversal pattern.
Double Bottom Reversal
The Double Bottom reversal pattern is the bullish version of the Double Top that can form after a downtrend. The pattern may form when the sentiment that was formerly producing the downtrend is now possibly shifting and selling pressure is not strong enough to produce a lower swing low to keep the downtrend intact.
This is an easy-to-recognize pattern that looks like the letter W. The pattern is a reliable reversal pattern that can be used to enter a bullish position after a bearish trend, especially when the next swing low is even higher.
It consists of 2 bottoms at nearly the same level with a peak in between, which creates the neckline. The second bottom does not break the level of the first bottom, so the price retested this level and tried to make a lower low, but failed. Price breaking the neckline and closing above it would complete the pattern.
Traders look for additional confirmation and aggressive traders may enter a bullish position from the second bottom. The target can be estimated by measuring the height of the pattern and projecting this upwards from the neckline.
You also might come across references of a “Adam & Eve Double Bottom.” This is basically a double bottom pattern forming after a downtrend whereas the first, “Adam” bottom is specifically a narrow, pointed bottom, perhaps with a one-day downward spike. The second, “Eve” bottom is more rounded looking and wider.
Much like a Double Bottom pattern, a Triple Bottom pattern is otherwise a longer term reversal pattern.
Double Bottom Continuation
This prolific variation of the Double Bottom is a prominent continuation pattern that has been taken advantage of by traders in the stock market for many decades. Again, this is an easy-to-recognize pattern that looks like the letter W, but there are important nuances to it that especially swing traders look for. Read on if you want to take it one step further.
The pattern entails a prior uptrend of at least some 30% followed by two swings (legs) down and a rally up between them, and a final swing high into the breakout. The depth of the first leg down, or initial correction, could be between 15% to 35%, perhaps more depending on how the overall market corrects. The middle peak of the pattern should be below it’s starting high and above half the height of the first leg down.
For any bullish pattern to reflect a promising trade setup, it is important that it can demonstrate that sellers exhausted themselves during the later part during the development of the pattern. Less supply generates an imbalance with demand and makes it easier for price action to again rally and breakout. Here, the last trigger-happy sellers shake out during the second swing low as it undercuts the low of the first leg. A discerning trader looks for a slightly lower low in the second leg.
The time for the development of the pattern should be at least seven weeks. Again, a surge in volume greater than 50% of average during the subsequent rally should accompany a breakout. Without these vitals, an experienced trader would consider the pattern a faulty Double Bottom. The recommended buy point would be just above the level of the middle peak of the W.
If there isn’t quite enough volume to support the breakout, hold of buying the coin and wait if a handle area forms (see Cup with Handle pattern).
A base like this Double Bottom pattern may form during a long run-up of the asset in the market, and market participants may feel that it is too late to now take a position in the asset. It may feel counter-intuitive to buy a technical breakout at that time. However, the ability to identify a proper base will afford a trader the opportunity to still profit when others not savvy in technical analysis may look away.