Understanding Double Top and Bottom Patterns, and their Practical Application
Embarking on a journey as a cryptocurrency trader may initially seem daunting, especially when confronted with complex trading charts adorned with unfamiliar lines and patterns. However, as you become more proficient in deciphering charts, you can explore and use several technical indicators to read the current price dynamics of an asset.
Among the plethora of available patterns, the double top and double bottom patterns distinguish themselves with their reliability and versatility. This guide will look into the nuances of these patterns, exploring their formation, practical applications, and how traders can adeptly employ them to make well-informed decisions while engaging in futures trading on the LBank platform.
What are these Patterns?
Patterns, as we know, are sequences of repeated lines or shapes at regular intervals over a surface. Similarly, in trading, patterns are arrangements formed by the movements of asset prices on a chart. In other words, a pattern connects price point A to B, such as opening and closing prices or highs or lows, at a certain period of time. It’s safe to refer to patterns as the core basis of technical analysis. Traders read patterns to predict the potential direction of an asset price.
These trading patterns often occur at any point or measure in time and spotting them in real time can be quite challenging. Various types of patterns in technical analysis, include the cup and handle, double top and bottom patterns, and the head-and-shoulders pattern. This guide will focus on double top and bottom patterns, and how you can apply them.
What are the Double Top And Bottoms Patterns?
Double top and bottom patterns rank among the most prevalent trading patterns in traditional markets like forex, stocks, and commodities. Interestingly, these patterns have gained much popularity in the crypto markets recently.
Source: fxopen
Identifying them is relatively straightforward since they tend to evolve gradually over an extended period, and their appearance may not always conform precisely to the classic “M” or “W” shape due to the inherent price movement variability. When analyzing these chart patterns, it’s imperative for investors to grasp that the peaks and troughs need not align perfectly for the “M” or “W” pattern to be discernible.
Double Top Pattern
The double top pattern is a reversal pattern that signals a potential change in the prevailing trend. This M-Shaped pattern typically occurs in an uptrend and consists of two distinct highs that are roughly at the same price level. This creates a resistance level, and the failure to make a higher high indicates a loss of momentum from the buyers in the market.
Source: elearnmarkets
Trading Double Top Patterns
The most common way to trade a double top pattern is by waiting for the neckline to break. The neckline is a support level formed between the two tops. When the price breaks below this neckline, it makes a lower low, confirming a trend change from an uptrend to a downtrend. Traders can take a short position after the neckline break, as it signifies a reversal and a shift in market sentiment.
Alternatively, traders can opt for a pullback entry after the neckline break. Instead of entering the trade immediately after the break, they can wait for a price retracement to the neckline, which now acts as a new resistance level. This entry method is considered slightly imperfect as it involves a wider zone. However, confirmation through an inside bar and a bearish momentum candle can make it a viable option for some traders.
Double Bottom Patterns
The double bottom pattern is the opposite of the double top pattern, and involves a W-shaped pattern with two peaks with a decent increase between them. This chart pattern occurs in a downtrend and consists of two lows that are approximately at the same price level, creating a support level. Failure to make a lower low signals a loss of momentum from the sellers in the market.
Source: babypips
Trading Double Bottom Pattern
Similar to the double top pattern, the neckline break is a primary entry point for traders. When the price breaks above the neckline, it makes a higher high, confirming a trend change from a downtrend to an uptrend. Traders can enter a long position after the neckline break, as it signifies a reversal and a shift in market sentiment.
Just as with the double top pattern, traders can choose to wait for a pullback entry after the neckline break in the double bottom pattern. This entry method may be considered imperfect due to the wider zone of support-turned-resistance, but it can be validated by multiple consolidation candles and a higher high candle formation.
Practical Application of Double Top and Bottom Patterns in Trading
- Combining with Key Levels
Another effective approach to trading double top and bottom patterns is to combine them with key support and resistance levels. By identifying these levels through reversal points, traders can increase the reliability of their entries.
Double Top with Key Resistance Level: When a double top pattern forms near a key resistance level, it enhances the trade setup’s validity. The neckline break in this context confirms the reversal and opens opportunities for short entries.
Double Bottom with Key Support Level: Conversely, when a double bottom pattern forms near a key support level, it strengthens the trade setup. The neckline break in this scenario confirms the reversal and offers opportunities for long entries.
- Early Entry
For short-term traders seeking more entries, an early entry at the second reversal point of the double top or bottom pattern can be a viable strategy. This approach involves entering the trade before the neckline break, potentially capturing more of the price movement.
Wrapping Up
In crypto futures trading, grasping technical analysis patterns like double tops and bottoms can greatly boost a trader’s success. These patterns offer flexible entry and exit strategies. Traders can identify and use these patterns by watching for neckline breaks, pullbacks, or early entry opportunities. However, it’s important to note that these methods are not foolproof, as they sometimes lead to false signals or misinterpretations of trend reversals. To increase reliability in spotting trend reversals, consider combining them with analysis of key support and resistance levels.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
