If you're reading this article, then you've definitely heard about the stock market. Many of you might have heard words such as scam, dangerous, or gamble used as synonyms for the stock market. Some of you believe it's true; we do too! (Just kidding!).
But deep down, everyone wants to be the Harshad Mehta of their family (minus the scam and the imprisonment, of course). From movies like Scam 1992 to Gafla and, of course, the recent success of Abhishek Bachchan, The Big Bull, the crazy lives of these notorious traders portrayed on the silver screen have made us more aware of the stock market.
But in real life, things ain't that easy and to gain more knowledge about the stock market, you need to learn essential concepts related to it. One such topic is the Double Top and Double Bottom patterns. Let's learn more about them!
What are Double Top and Double Bottom?
Peter Lynch, the famous American investor, once said: "In this business, if you're good, you're right six times out of ten. You're never going to be right nine out of ten." And we couldn't agree more!
Even for an investor to be right six times out of ten, they need to understand technical analyses of the stock market better than the average person. The Double Top and Double Bottom patterns are charts that help in the technical analysis of stocks.
The Double Top and Double Bottom patterns confirm price reversals in the stock market. If you're not careful about price reversals, you may incur losses.
Double Top pattern
The Double Top pattern is in the shape of the letter 'M'. It indicates a bearish price reversal. This type of pattern follows an uptrend of the curve on the chart. The Double Top pattern shows two simultaneous peaks crossing the support level, and this level is termed the neckline.
You may be curious about when is the first peak observed in Double Top pattern stocks. Well, the first peak is observed immediately after a strong uptrend. Thus, the price tends to be bullish and might rise during the second peak.
Additionally, you should know that the stock's bearish reversal pattern is observed after the price breaks through the support level.
Double Bottom pattern
Contrary to the Double Top pattern, the Double Bottom pattern shows a bullish reversal trend. This pattern occurs due to the downtrend of the market and is shaped like the letter 'W'.
This pattern forms when two lows are simultaneously placed below the neckline or the resistance level. The pattern is completed when the prices start moving up towards the neckline after the stock hits the second low.
What do Double Top and Double Bottom signify?
You may be intrigued as to why traders consider the Double Top and Double Bottom patterns with such seriousness. Here's why! These patterns help you identify the reversal trend in the market, thus reducing the risk of losses and increasing profit growth. Studying these charts and other factors like capital or reversal volume predominantly gives investors positive returns. You should use both charts together while trading to get the best result.
The significance of Double Top and Double Bottom patterns is as follows:
Significance of Double Top
The Double Top pattern signifies lower profits and, at the same time, minimises the loss in the stock market. This pattern helps in buying desired stocks at a fairly lower price.
Significance of Double Bottom
The Double Bottom pattern signifies higher profits as the price of the stock moves above the neckline. It results in higher profits as you enter the long position after the second low. It also helps in identifying the downtrend pattern of the stock.
By following this pattern, you can identify the possible timing for the stock price increase. This, in turn, helps you buy or sell the respective shares to gain better profits.
Charles Dow introduced the Double Top and Double Bottom pattern in his Dow Theory.
How can we execute a trade when Double Top and Double Bottom patterns appear?
Here's how you can trade when either Double Top or Double Bottom patterns appear in the chart:
Trading with Double Top
When a Double Top pattern appears while you trade, here's what you should do:
- The trader should consider the market phase and study if it's in the upward or downward direction. Then they must properly read the chart, and they will observe an uptrend just before the Double Top pattern occurs.
- At this point, the trader will have a better opportunity to deal with the concerned stocks. Traders should be able to identify the two rounding tops and measure the peak.
- Traders have to work under such circumstances by going for a short profit margin just after the price of the stock goes below the neckline. For example, it would be the right time to focus on your profit margin by creating a Stop-Loss range or fixing the price targets of the particular stock.
Trading with Double Bottom
When a Double Bottom pattern appears while you trade, here's how you should deal with it:
- After studying the market phase, traders should be able to spot the Double Bottom pattern.
- For this, the trader needs to identify the downtrend that happens just before the second of the Double Bottom patterns. At this time, the trader should mark and measure the two bottoms in the chart.
- The trader would be required to enter a long position immediately after the stock price goes above the neckline to make a trade at such time.
Rakesh Jhunjhunwala, India's Warren Buffet, once said: "Always go against the tide. Buy when others are selling and sell when others are buying."
Just like Abhishek Bachchan in The Big Bull, you must build your strategy in the financial market. And to build a proper strategy, you must clear your doubts about various aspects of the stock market, especially the various charts and patterns.
Double Top and Double Bottom patterns are trusted chart patterns, and almost every experienced trader relies on them. Be it for day trading or even in long-term investment plans, Double Top and Double Bottom patterns are best for deciding when to open short or long positions, keeping the peaks in mind.
Studying the reversal trends helps enhance your growth in trading. Sometimes you might feel lost among the charts and patterns, but you should know that you won't become Warren Buffet in a day; even the best ones sometimes stumble and fall.
So it's okay to be a bit uncertain in this field, but with knowledge, you will surely reach wherever you aim to be. Just have faith in yourself and continue to read our articles!