Double Top and Double Bottom in Crypto Trading

by | Aug 9, 2021 | Blog

Double top and double bottom patterns in crypto trading can be used to explain why an asset’s value is moving in a certain way and help to predict what might happen next. These signals occur over longer periods so it’s important to correctly identify them to avoid entering into a trade anticipating the outcome, only for the price to move in the opposite direction. To understand how to spot and trade double tops and double bottoms, we’re going to assume you already know how to read a candlestick chart.

Double Top

Crypto trading double top formation

A double top is formed when an upward trend comes to a peak and starts to decline, painting the shape of an upside-down “U”, before rising back up to a similar level to the first peak and forming an “M” shape. The pattern signals that investors are taking final profits before a bearish reversal. Because of the nature of those investors wanting to sell at the top, the second peak is usually slightly lower than the initial peak. Because a double top is often formed over a longer period, it’s recommended to use at least the daily chart to identify one as the volatility of the hourly can make it harder to spot.

Double Bottom

W formation in crypto

A double bottom is formed in exactly the opposite way to the double top. A previous downtrend finds a bottom before starting to rise again. Investors then sell to minimise the losses of this downtrend, which causes the price to fall again, hitting a similar level to the first trough. The market then gains momentum once again and paints the shape of a “W” before entering a new bullish period. A common trading practise when a double bottom is identified is to enter a long position in the hope of profiting from the forthcoming bullish rally. Like a double top, a double bottom is easier to see on a chart of a longer timeframe, such as the daily chart.

 

 

How should you trade a double top or double bottom?

Most technical analysis patterns which form over multiple days or weeks are fairly reliable. However, it’s important to notice that “W” and “M” patterns occur very frequently on a candlestick chart. Double tops and double bottoms are very effective if they are identified correctly but it’s critical to avoid trading or investing based solely on the appearance of two consecutive peaks or troughs. Taking the time to pinpoint exact support or resistance levels can make all the difference between profiting and being caught out.

In Summary

As always, a best practise method of investment and trading is to do your research. Knowing what patterns to look out for on a chart is key but knowing when not to trust these patterns is where the skill truly lies. Using multiple signals in conjunction with one another is important to not be caught out by falsely identifying a pattern so look out for other, lower timeframe indicators to confirm the existence of the double top or double bottom.

 

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