A:

Fluctuating prices over time tend to cause patterns easily identifiable on a chart. Two of the most commonly seen patterns are double tops and double bottoms. Each represent the testing and resistance of extremes in pricing and represent either overbought or oversold situations. Traders often try to capitalize on these trends for short-term profits, knowing that a trend soon develops.

A double top pattern is created when a new high is reached, and then quickly reversed. When viewed on a chart, this resembles the letter "M." Since markets are made up of buyers and sellers, equal activity by the two creates an unchanged price; however, when buyer activity exceeds seller activity, prices move up. Thus, a surge in buying brings about new highs until sellers jump in and push prices back to the previous equilibrium, or support levels. If the double top is not completed, traders need to look for high volume at the return to the high point, as this often signals a return to an uptrend.

A double bottom pattern is exactly the opposite of a double top. It is created by prices testing a new low, reversing, and then returning to the low point, forming a "W" shape. Since this pattern is seen often in oversold situations, traders see it as a bottoming in the price and expect an uptrend afterward. To correctly identify this scenario, traders should look for weak volume, or support, at the low point, and compare indicators such as Relative Strength Index, or RSI, and the Moving Average Convergence Divergence, or MACD, to gain perspective on the momentum behind the moves.

RELATED FAQS
  1. How effective are double bottoms in spotting a change in direction of the overall ...

    Learn more about the double bottom price chart pattern, a commonly bullish reversal indicator that can also be used to establish ... Read Answer >>
  2. What does a double bottom tell a trader about the overall trend?

    Learn how a double bottom pattern forms on a price chart and why many traders consider double bottoms to be a sign of reversal ... Read Answer >>
  3. What is a common price target when identifying a double bottom?

    Learn how to identify a double bottom stock pattern and where to set a target selling price point to get the most out of ... Read Answer >>
  4. What are common trading strategies used when identifying a double bottom

    Use simple, low-risk trading strategies to take advantage of a double bottom formation. Traders typically take one of these ... Read Answer >>
  5. How effective is creating trade entries after spotting a Multiple Tops pattern?

    Understand the basics of trading based on a multiple tops chart pattern, and learn what elements should be of primary focus ... Read Answer >>
  6. How are Multiple Tops patterns interpreted by analysts and traders?

    Understand how the multiple tops chart pattern is interpreted by traders and analysts and what makes it such a powerful reversal ... Read Answer >>
Related Articles
  1. Trading

    Double Tops Giving Sell Signals (AMT, BND)

    These REITs and ETFs have formed a bearish topping pattern. Rallies are selling opportunities, as lower prices are expected.
  2. Investing

    How To Interpret Technical Analysis Price Patterns: Triple Tops And Bottoms

    Triple and double tops and bottoms may be tough to spot, but once you learn them, they can be powerful patterns.
  3. Trading

    Time to Sell These Stocks Wiith Double Tops

    These stocks have completed a topping pattern, indicating their run higher may be over.
  4. Trading

    Using Double Tops And Double Bottoms In Currency Trading

    Find out how to apply the two most common price reversal patterns to your trading.
  5. Investing

    Introduction To Technical Analysis Price Patterns

    To "find your game" in technical analysis, you need to be able to recognize reversals and continuations as they form.
RELATED TERMS
  1. Double Top And Bottom

    Chart patterns in which the quote for the underlying investment ...
  2. Double Bottom

    A charting pattern used in technical analysis. It describes the ...
  3. Double Up

    An investing strategy in which a trader doubles his or her current ...
  4. Pattern

    In technical analysis, the distinctive formation created by the ...
  5. Triple Top

    A pattern used in technical analysis to predict the reversal ...
  6. Triple Bottom

    A pattern used in technical analysis to predict the reversal ...
Hot Definitions
  1. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  2. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  5. Indirect Tax

    A tax that increases the price of a good so that consumers are actually paying the tax by paying more for the products. An ...
  6. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
Trading Center