The second significant reversal pattern is called "Double Top and Double Bottom". It is actually two patterns that are the opposite of each other.
The Double Top describes a pattern in which prices begin to rise until they reach a peak and then drop. The price begins to rise again until it hits the same level as the first rise to create the second peak. At that point it makes another drop. The finished pattern looks like the letter "M". A Double Top can only be complete when prices decline below the lowest low.
The price level where the Double Top peaks is considered a resistance level because technical analysts believe that the stock is having difficulty going above that level. The Double Top is one of the most frequently seen reversal pattern. It signals the end of an upward trend in a currency’s price.
The other member of this pair is called the "Double Bottom". This is a pattern in which the price drops followed by a rally. The price then drops again to approximately the same level as the first drop. This is followed by another rally. The finished pattern looks like the letter "W". A Double Bottom is only complete when prices rise above the highest high. The Double Bottom is a reversal of a downward trend in a currency’s price.
The low that is hit both times is considered a support level. Traders interpret the bottoms as a signal to buy a currency in anticipation of the rise to follow. However, volume is a major consideration. Volume is usually higher on the first bottom than on the second. It moves downward as the pattern forms and then increases after the pattern hits its lows. The final increase in volume signals the pattern is becoming complete.
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