‎Reversal Chart Patterns

Double and triple tops and bottoms are reversal chart patterns.

DOUBLE TOP AND DOUBLE BOTTOM

Double top

At the conclusion of a bull market, the double top is a common price formation. On a market's price-versus-time chart, it shows as two successive peaks of almost the same price. The two peaks are separated by a price minimum, or valley. 

The price level of this minimum is referred to as the formation's neck line. When the price goes below the neck line, the formation is full and confirmed, suggesting that additional price collapse is imminent or extremely probable.

The double top pattern indicates that demand outpaced supply (buyers prevailed) up to the first top, causing prices to climb. The supply-demand balance then shifts in the other direction, with supply outpacing demand (sellers predominating), leading prices to decrease. 

Following a price valley, buyers regain control and prices increase. If traders see that prices are not breaking through their resistance level at the initial top, sellers may once again triumph, dropping prices and causing a double top to occur. If prices go below the neck line, it is often seen as a negative indication.

The time between the two peaks is also a factor in assessing whether or not a double top pattern exists. If the tops emerge at the same level but at relatively close intervals in time, the likelihood is that they are part of the consolidation and that the trend will restart.

Also Read: Learn How To Use Chart Patterns Effectively

Another factor to consider while analysing this formation is volume. Price hits the initial peak on high volume before falling down the valley on low volume. Another rally up to the second peak should be attempted at a reduced volume.

Triple top

Triple top

Formation

In a rising market trend, the formation of triple tops is less common than that of double tops. Volume is often low during the second rally up and much lower during the formation of the third top. The peaks may or may not be equally spaced, as in the case of a Double top. 

The intervening valleys may or may not bottom out at the same level, i.e. the first or second valley may be lower. When the price decrease from the third top falls below the bottom of the lowest valley between the three peaks, the triple top is confirmed.

Strategy for Selling

To take advantage of this formation, traders can employ a variety of trading strategies. Of course, the first and second peaks are ideal for placing sell orders. It is a good time to sell once the Double Top has been confirmed and prices are heading up again with minimal volume. One may sell short with a stop (estimated loss) above the highest peak of the Double Top.

After a triple top has formed and a fourth top is forming at the lower level, the next ideal spot to sell would be.

Observation reveals that four tops or bottoms at identical levels are uncommon. If prices continue to rise to the level of the last three tops, there is a significant likelihood that they will rise even higher. They normally diminish if they return to the same level a fourth time.

Also Read: Top Tips For Using Chart Patterns To trade

Double bottom

Double Bottom

Double Bottom

In a sinking market, a double bottom is the last formation. Except for the opposite price connection, it is identical to the double top. The pattern is formed by two price minima separated by a local peak that defines the neck line.

The majority of the rules that apply to the double top formation also apply to the double bottom pattern.

While prices remain level at the second bottom, volume should show a significant rise throughout the rally up.

Triple bottom

Triple bottom

The majority of the rules that govern the formation of a triple top may be inverted in the formation of a triple bottom. 

In terms of volume, the third low bottom should be on low volume, and the rally up from that bottom should show a significant rise in activity.

The formation of Triple Bottom happens throughout the accumulation stage.