Double Top
A double
top is a reversal pattern that is formed after there is an extended move up.
The "tops" are peaks which are formed when the price hits a certain
level that can't be broken.
After
hitting this level, the price will bounce off it slightly, but then return back
to test the level again. If the price bounces off of that level again, then you
have a DOUBLE top!
In the
chart above you can see that two peaks or "tops" were formed after a
strong move up.
Notice
how the second top was not able to break the high of the first top. This is a
strong sign that a reversal is going to occur because it is telling us that the
buying pressure is just about finished.
With the
double top, we would place our entry order below the neckline because we are
anticipating a reversal of the uptrend.
Wow! We
must be psychic or something because we always seem to be right!
Looking
at the chart you can see that the price breaks the neckline and makes a nice
move down. Remember that double tops are a trend reversal formation so you'll
want to look for these after there is a strong uptrend.
You'll
also notice that the drop is approximately the same height as the double top
formation. Keep that in mind because that'll be useful in setting profit targets.
Double Bottom
The
double bottom is also a trend reversal formation, but this time we are looking
to go long instead of short. These formations occur after extended downtrends
when two valleys or "bottoms" have been formed.
You can
see from the chart above that after the previous downtrend, the price formed
two valleys because it wasn't able to go below a certain level.
Notice
how the second bottom wasn't able to significantly break the first bottom. This
is a sign that the selling pressure is about finished, and that a reversal is
about to occur.
Will you
look at that!
The price
broke the neckline and made a nice move up.
See how
the price jumped by almost the same height as that of the double bottom
formation?
Remember,
just like double tops, double bottoms are also trend reversal formations.
You'll want to look for these after a strong downtrend.
