Double top and double bottom
If the price tries the same level twice and fails to break it, a double top forms. If it tries twice and fails to break it, a double bottom forms. The formation is only complete when the neckline in between is broken by a close.
In the chart above, you see two points and a horizontal, dashed line between them. The points are where the price reached the same area twice; on the wide screen, ‘HIGH 1’, ‘HIGH 2’ or ‘LOW 1’, ‘LOW 2’ is written next to them. The dashed line is the ‘NECKLINE’. The color of the formation tells its direction: red for a double top (bearish), green for a double bottom (bullish).
A double top forms as follows: the price rises, encounters sellers at a peak, and pulls back. Then it goes back to the same peak but fails to break it again. A price stopping at the same place twice indicates a strong selling wall there. A double bottom is its mirror image: the price finds buyers twice at the same bottom, and the decline stops.
The neckline is the extreme point of the pullback between the two tops (or two bottoms). The real moment of the formation is here. Seeing two tops alone proves nothing; a double top is only a possibility until the price closes below the neckline. Similarly, a double bottom is completed with a close above the neckline.
On the right side, you see the ‘TARGET’ and ‘STOP’ levels. The target is found by classical measurement: the height between the top and the neckline is projected from the breakout point in the direction of the breakout. The stop is the level that invalidates the formation: slightly above the second top in a double top, slightly below the second bottom in a double bottom. If the price goes there, the formation is broken, and the expectation disappears.
The two tops do not have to be at exactly the same price. Being close to each other is sufficient. If the second top remains slightly below the first, it is clearer that buyers are weakening; if it goes slightly above and then falls back, this is called a false breakout and is often a trap for sellers.
How to read it
- First, find the two tops (or bottoms), then draw the neckline from the extreme point of the pullback between them.
- Wait for the neckline to be broken by a close. If there is no breakout, there is no formation; there is only a horizontal band.
- Calculate the target by height measurement but consider it a probable area, not a definitive stop.
- Place the stop above the second top (below the second bottom in a double bottom). If the price goes there, the formation is broken.
Trap
The most common mistake is to sell as soon as you see the second top or buy as soon as you see the second bottom. However, before the neckline breaks, the price might make a third attempt and break the top; then what you thought was a 'double top' turns into a continuation of the uptrend. The second mistake is to panic at the first pullback after the breakout: the price often retests the neckline it broke. This pullback does not mean the formation is broken; the real breakdown is when the stop level is crossed.
Tip
When the formation appears on the analysis screen, the card also states its status: a 'possible' formation has not yet broken its neckline, a 'confirmed' formation has. Base your decision on confirmation, not on a possible formation; if you open a trade before confirmation, keep the position small.
Glossary
- Double top
- A bearish reversal pattern where the price tries the same top twice and fails to break it.
- Double bottom
- A bullish reversal pattern where the price bounces twice from the same bottom.
- Neckline
- The extreme point of the pullback between two tops or two bottoms; the formation is completed when it is broken.
- False breakout
- When the price briefly crosses a level and immediately returns.
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Examine the formation card in an analysis →For information only, not investment advice.