Double tops and double bottoms are frequently-occurring and reliable cryptocurrency reversal patterns. A double top is a bearish reversal formation that signals a cryptocurrency price rally is no longer sustainable, and that markets are primed for a change in direction.
A double bottom is a bullish cryptocurrency chart pattern that appears after a pronounced down trend and indicates that cryptocurrency prices are more than likely to head higher.
Cryptocurrency Double Top
As the name suggests, the double top pattern is composed of two consecutive cryptocurrency price peaks that are roughly of equal height, with a distinct trough in between. Just like any other major reversal pattern, it is imperative that a preceding trend be in place to reverse from.
In the case of the double top, a significant uptrend of several bars is a necessary prerequisite. The first peak of the pattern marks the highest point of the current trend. Once the first peak is plotted, a price pull-back takes place that typically lasts for 10% to 20% of the prior up move.
Bulls intervene at this point to absorb the selling pressure and take prices higher. But they fail to break through the first peak, which represents a significant resistance zone. While exact peaks are desirable, there is some latitude. Usually, a peak within a 3% distance of the first peak is considered valid.
The subsequent drop from the second peak should be accompanied by an expansion in volume. This serves as an affirmation of the fact that the forces of demand are weakening, and a move lower is imminent. The double top pattern is confirmed when cryptocurrency prices break down below the support level that exists at the lowest point between the two peaks.
The distance from the support break to either of the price peaks should be deducted from the support break area to arrive at a price target for the breakout move. This would imply that the bigger the double top formation, the larger the likely cryptocurrency decline.
Cryptocurrency Chart Example
Cryptocurrency Double Bottom
The double bottom pattern is made up of two successive cryptocurrency price troughs that are roughly of equal depth, with a well-defined peak in between. As is the case with the double top formation, there must be an ongoing trend to reverse from.
The double bottom requires that a significant downtrend of several bars be in place for the pattern to be deemed acceptable. The first trough represents the lowest point of the current trend, and is fairly normal in appearance. After the first trough has been printed, a minor price advance materializes that typically ranges from 10% to 20% of the last down move.
Some bears see this as opportunity to load up on their shorts and enter to push prices lower. But this bearish volume quickly dries up and prices are unable to breach through the strong support zone created by the first trough. This should serve as a warning that a change in trend from down to up is in the offing.
The double bottom pattern is finally confirmed once cryptocurrency prices breakout above the highest point between the two troughs on greater than average volumes. The distance from the resistance break area to the low of the troughs can be added to the resistance break to estimate a cryptocurrency price target for the ensuing upward move.
Traders should note that broken cryptocurrency chart resistance levels often tend to turn to future support areas. There are times when following the completion of a double bottom pattern, prices temporarily retrace to near the resistance zone that marks the high between the two troughs. Such dips offer a second chance to traders who missed out on the original breakout to initiate fresh long positions.
Cryptocurrency Chart Example
Important Points to Remember About Double Tops and Double Bottoms
- Double bottoms usually take longer than double tops to form
- The peaks or troughs should not be too close to each other
- Traders may apply a price or time filter to differentiate between valid and false pattern breakouts
- Stop losses on long positions can be placed below the low of the pattern, while stop losses for short trades can be placed above the most recent swing high within the formation
- The target price of a successful pattern is only an approximation of how far cryptocurrency prices can move following a breakout and the price may or may not reach the target level, which is why traders need to place a protective stop loss when entering in to a trade
The Final Word
Most classical chartists associate double top and double bottom patterns with an intermediate to long-term trend reversal, but that does not imply that traders can’t employ these versatile formations to shorter time-frames. The rules remain the same and the reliability of the signals also doesn’t suffer.