The Double Top and Double Bottom Patterns are classified as reversal patterns, this means that once the chart pattern has been identified, the most probable outcome, is that when the price breaks out of the pattern it is going to go in the Opposite direction as when it entered the pattern. So, if a chart is heading Up, then it hits some resistance and a Double Top appears, once the price breaks out it is going to start going down. Conversely, If the chart is heading down, and then it hits resistance and forms a Double Bottom pattern it is going to start heading up once it breaks free. For this reason, both of these patterns are great to help you decide when it is a good time to enter a position, or exit one.
The Double Top pattern is recognizable from its resemblance to the letter “M” and conversely the Double Bottom pattern is recognizable from its resemblance to the letter “W”. The Double Top has two peaks with a V drop in the center of the two, the peaks do not have to be at exactly the same level, but they should be close to each other. the lowest point in the center ‘V’ of the Double top (and the opposite center point of Double Bottoms), creates the breakout point, so the pattern does not truly form, until the chart has broken out past that point. In both patterns you will normally see an increase in volume and/or an increase in the slope of the price movement as the price breaks out of the pattern.
For chart patterns, I feel the best way to learn is ot look at some examples. so take a look at the examples I quickly drew up. As you can see in figures 1 and 2, both patterns are easily recognizable by their resemblance to M’s and W’s. To recap, the important points to remember when looking for these patterns, is, a beginning trend in a certain direction, then a peak, followed by a trough, then followed by another peak, and finally the patter nisn’t full until the price drops below the LOWEST point in between the two peaks.
Double Top and Bottom Chart Patterns are a fairly common occurrence so it may be in your best interest to take a moment to look at Figures 3 and 4 which are an examples I have provided of both the double Top and a double Bottom patterns in action. You’ll notice that they don’t always follow the clean lines that were in Figures 1 and 2, but the pattern is there. and it reacted as we had predicted. I have marked out the pattern with yellow lines.