It is simplest of classic pattern formation. Three reversal points are required for the formation of double top or bottom.This pattern is usually short-term pattern and is formed over 2-6 weeks. Commonly shorter duration patterns are more reliable.
Double top formation:
Double top pattern is formed by two peaks or top separated by single bottom or trough.
True double top pattern is formed in rising trend when entry in to the pattern is from below the trough or bottom price and exit is when price drops below the trough price.
Tops may be pointed or rounded. Pattern with both pointed tops or Eve-Eve variety is considered best in terms of performance. Occurrences of peak may not be at same level but both top should be at or within 5 per cent price range and bottom must be around or more than 10 per cent price range from the lower top.
e.g. In the Bank nifty daily chart, we can see double top formation in the months of June -July. Prices enter the pattern from below and form two tops ( T1 @ Rs 31653 and T2 @ Rs 31475) .Prices witness correction after breakout down and reach the lows of Rs 30566 before starting uptrend again.
Double bottom formation:
Double bottom pattern is formed by two bottoms or trough and one top or peak and resembles mirror image of the double top pattern.
It is formed in down trending market where entry into pattern is from above and exit is up ward direction.
Investor should not enter prematurely before the breakout below bottom when the pattern is forming, as pre-existing trend may continue and investors will lose money in such a case.
But once breakout occur this pattern is one of the best pattern to trade and gives good performance.
e.g. In the below chart, Gail stock formed double bottom around Rs 68 after sharp correction from Rs 108. It saw a breakout above 80. From the chart we can see, prices first experienced a throwback to breakout level and subsequently rallied to Rs 95.70.
Recently ITC witnessed almost 20 points rally after breakout from the double bottom formation.
Keys to keep in mind while trading double top or bottom:
Wait for breakout before entering trade.
Rule out consolidation before pattern formation, it perform better in trending market.
Volumes are not important but decrease through the pattern formation.
Eve – Eve pattern have good performance.
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