Takeaways

• A double top pattern forms an “M” on the chart, indicating an upcoming downtrend.
• A double bottom pattern forms a “W” on the chart, indicating an upcoming downtrend.

What is a double top pattern?

A double top pattern is formed when the stock price reaches two consecutive similar peaks in an uptrend, forming an “M” on the chart.

The low point between the two peaks is called the “confirmation point”. The neckline is drawn as a horizontal line passing the point, serving as the support level.

A double top pattern is complete when the price closes below the support level.

How do you trade a double top pattern?

Implications

A double top pattern is considered a bearish signal, indicating a possible reversal of the current uptrend to a downtrend.

Entry point

Breakout happens when the support level is broken, indicating an upcoming downtrend. Investors may choose to open a short position at this point. Others may choose to close a long position at the breakout.

Profit target

The profit target is the difference between the highest point and the lowest point of the pattern. As the red shadow shows below, it’s estimated that the stock price may drop as low as $19.6-$18.7. (Enable ‘Technical Signals’ in ‘Chart Toolbox’ > ’Settings’ to read automatic pattern signals in a chart)

Investors may place a stop order according to the target price to secure profits or stop losses.

What is a double bottom pattern?

A double bottom pattern is a double top pattern upside down. It is formed when the stock price makes two consecutive similar lows in a downtrend, forming a “W” on the chart.

The high point between the two lows is called the “confirmation point”. The neckline is drawn as a horizontal line passing the point, serving as the resistance level.

A double top pattern is complete when the price closes below the support level.

How do you trade a double bottom pattern?

Implications

A double bottom pattern is considered a bullish signal, indicating a possible reversal of the current downtrend to an uptrend.

Entry point

Breakout happens when the resistance level is broken, indicating an upcoming uptrend. Investors may choose to open a long position at this point. Others may choose to close a short position at the breakout.

Profit target

Similar to the double top pattern, the profit target is the difference between the highest point and the lowest point of the pattern.

*Note: The pattern signals are not 100% accurate. Use other technical analysis methods, such as support and resistance or MA, to confirm a price reversal.

What's More

-Try it out on paper trading 

-Take a quiz to evaluate your technique