Double-tops or double-bottoms, commonly referred to as “M Tops” and “W Bottoms,” are common almost in all kinds of time charts. As one of the most commonly used technical patterns by traders, they are also a type of reversal pattern.

Identify Double-Top and Double-Bottom Patterns

Double-Top Pattern (M Tops)

It is not hard to identify the double-top pattern which often appears in the rising market. With its shape similar to the English letter “M”, the double top pattern is often called the M tops. It usually indicates the end of a rising market.

How the Double-Top Pattern forms

The price is adjusted after a long period of rise. Then it rises again to the high point close to the first high point where it starts to fall again and fall below the previous adjustment low point, that is, the neckline level. Subsequently, the price rebounds to around the neckline and falls back again, thus forming a downward trend in which two high points are moving downward.

Why does the Double-Top Pattern form?

When the price reaches a certain height, some investors with a strong awareness of controlling risk and the major holders who have gained huge profits start to sell their assets, and the price falls accordingly. However, those dealers haven’t sold out all their holdings and want to trade their remaining currencies, trying to raise the price. At this time, the price does go up when investors who didn’t sell at the last high point worry that the price will fall back and begin to reduce their positions at high prices, making it impossible for the price to break through the previous high. As the price fluctuates or falls back, more and more holders begin to sell their assets. Finally, the price falls below the low point (neckline), and then forms a downward trend after failing to counterattack the neckline.

Double-Bottom Pattern (W Bottoms)

Opposite to the double-top pattern, the double-bottom pattern is similar to the English letter “W” which gives it the name “W Bottoms”. This pattern indicates that a downtrend is about to usher in a reversal.

How the Double-Bottom Pattern forms

When the price rebounds after a long period of decline, but then falls again, the low point of the second decline falls back to the vicinity of the first low point but higher than this low point. More holders enter the market at this time, promoting the price to increase and break through the previous rebound high (neckline) sharply. A double-bottom support then forms. Usually, after the price breaks through the high point, it will fall back to the neckline again, and an upward trend will be formed after the price stops falling.

Why does it form the Double-Bottom Pattern

The long-term price decline brings about a low valuation. At this time, some bottom hunters begin to bravely enter the market, causing the price to rebound. However, the increase in the price prompts some holders to sell their assets for profits, which drags down the price again. Whereas, trading volumes are obviously less than that at the last dip. Coupled with the selling of traders who missed the last high point, the price fails to slip below the last low point. As the price rebounded, more and more funds began to enter the market. As a result, thanks to the purchases, the final price breaks through the previous rebound high point (neckline), forming a “double-bottom support”.

Trading Tips for Double-Top and Double-Bottom Patterns

As we now understand the M tops and the W bottoms, how can we seize the best trading opportunity by using these two technical patterns?

Trading Tips for the Double-Top Pattern

The picture above is a K-line chart of BTC/USDT on the Gate.io platform. After drawing a horizontal line through point B, we get the neckline. The section above the neckline is the dominant area for bulls. Within this range, it is advisable to buy up and not to sell short. When point D’s physical closing line is lower than point B’s physical closing line, a selling opportunity comes.

Sometimes the “double-top” will form a counterattack, but the counterattack cannot effectively break through the neckline F, thus forming a downward trend line connecting two high points. At this time, the second opportunity for traders to sell is at point F.

Trading Tips for Double-Bottom Pattern

The picture above is a K-line chart of BTC/USDT on the Gate.io platform. Let’s also draw a horizontal line through point B to get the neckline. When point D’s closing line is above point B’s closing line, the first buying opportunity appears.

After the double-bottom forms and the price goes up, the price will fall back but cannot fall below the neckline F, thus forming a rising slope connecting two low points. Therefore, when the price reaches the neckline F point, there will be a second buying opportunity.

Dos and Don’ts of Trading at Double-Top and Double-Bottom Patterns

There are some traps in the double-top and double-bottom patterns, such as false downward breakthroughs in the double-bottom pattern and false upward breakthroughs in the double-top pattern. To avoid these traps, it is advisable to pay attention to the following tips:

1. Pay attention to a composite chart of a “double-top” crossing the “double-bottom” pattern. Some “double-bottoms” consist of an “M” shape in their forming process. During the stepping-back process, the prices decline below the neckline, which is very deceptive. In fact, this pattern is usually an upgraded version of the “double-bottom” composed of a composite chart of “double-top” crossing the “double-bottom” pattern.

2. In the forming process of some “double-tops”, if the counterattack breaks through the neckline, the “double-top” may fail to establish or form a “multiple tops” pattern.

3. Time and retracement are two major factors affecting the size of the pattern, of which the former is more critical. In most real patterns, the time period between two tops or bottoms should be relatively long. If the time periods are too close to each other and there is only a small retracement between them, it may be part of a continuation pattern, rather than a double-top or double-bottom pattern.

Conclusion

Now that you have learned about Double-tops and Double-bottoms, it is clear that you know that whenever an M top appears, it indicates that there may be a certain selling pressure at this price, becoming a resistance to the increase in price; and the appearance of a W bottom means that there are some buy orders. In other words, they serve as a support for the price, preventing it from stopping falling.

Actually, M tops and W bottoms are almost certain to appear, but each person may make a different judgment. The M and W defined by others may not be right according to your judgment. In addition, if you check the patterns at different times, you will get different findings, so you can refer to the appropriate entry and exit prices based on your investment cycle.

Nevertheless, it must be noted that these patterns are only used as a reference for investment decision-making. What really matters is abiding by investment discipline, controlling risk properly, and establishing your investment methods, instead of trading exactly as the textbook says.