Double Tops & Bottoms
Stock chart analysis is necessary to find good trading opportunities. Some
of the best trading strategies involve identifying and trading double bottoms,
double tops, triples tops and bottoms. These patterns can form in all
markets including Stocks, Exchange Traded Funds, Forex,
Commodities, Bonds, Futures, etc.
- The first
bottom on a double bottom pattern forms at the end of a downtrend.
- The bottom
forms and there is a rally in the market. The extent of the rally will vary.
There is no set percentage required but experience in looking at charts will
help in identifying what a double bottom should look like.
- The second
bottom is when the market retests the support
met at the first bottom.
- The market
does not need to turn at the exact price at which the first bottom was made.
Often traders allow a 3% band around the price of the first bottom to match the
criteria of a double bottom.
looking for a double bottom like to see a rally on increased volume to demonstrate that buyers are
coming back into the market.
- The market
needs to break the neckline (the last highest price on the stock chart) to be
considered a double bottom. If the market meets resistance at the neckline and fails to break through to new levels
then it may be entering into a period of congestion.
- If the
market does break the neckline then the neckline itself may become a new level
typically look for the market to reach a target price that is double the range
of the double bottom to the neckline. In other words they take the rally from
the bottom to the neckline and add it on to the neckline to estimate a price
the market could reach. However,
be aware that the market may not make it all the way before declining again. Appropriate risk management and stop loss strategies should be in place. Nevertheless
a double bottom is an excellent opportunity to make a profit.
In the weekly candlestick chart of oil below, following a sustained decline the
market made its first bottom in August 2011 at the $75.62 level. It then
rallied to $90.50 in September. A decline then began to make a second bottom at
$75 in early October. The market rallied from the second bottom and eventually
reached a price of $110 by February 2012.
Lets call the price movement from the neckline to either bottom as $15. Adding
$15 to the neckline at $90.50 gives a price target of $105.50 which the market
reached and surpassed in February 2012.
Stock Chart: Double Bottom. View charts in interactive mode at ProRealTime.com.
A double top works the same way as a double bottom except in reverse. The
market rallies to the first top, declines and then rallies again to re-test the
previous resistance level (the first top). If the market fails to break new
highs then traders may look for a double top and take a short position.
In the daily candlestick chart of Euro Stoxx below the market made double tops at
the 3790 level on 28th March and 18th April. The decline to the neckline was 205
points to 3585 on 8th April. To estimate a target for an exit from a short
trade, a trader might subtract that range 205 points from 3585 to give 3380.
The market reached 3390 on 7th May but in fact went to 3380 and lower in June.
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