Cryptocurrency retail traders have borrowed the entire arsenal of technical analysis tools used in traditional markets, so they don’t have to reinvent the wheel. Even though the crypto market is still emerging and thus highly volatile, the prices are behaving based on the same old principles that relate to our intrinsic nature. Above all, the double top and double bottom is clearly a must-know for every trader.
The double bottom and top can accurately illustrate a reversal in market direction reversal, and it’s not a surprise they remain popular in all markets.
As an introduction, the double bottom pattern (W-shape) is a bullish reversal formation on the candlestick chart, though it can also be visible on the bar and even line charts. It is also conveyed as a mirror of the double top pattern (M-shape), which is a bearish reversal pattern.
Of course, these patterns can also relate to the traders’ psychology, and it’s best suited for analyzing the intermediate to longer-term view of a market. But the best part is, they work exceptionally well for cryptocurrencies like Bitcoin and altcoins.
Still, how are they applicable in crypto trading? Are they any different when in use in other markets beyond the traditional stock market? Let’s dive right in.
What Is A Double Bottom?
The double bottom pattern forms when two price bottoms are positioned at relatively the same level while a neckline acts as a resistance. This pattern shows up at the end of a downtrend and signals its reversal.
Typically, traders would usually wait for the price to break above the neckline to go for a long position. Still, you should only go long if you’re confident because there are chances where you’ll end up trading against the trend.
The key to using a double bottom pattern is the longer the duration between the two lows in the pattern, the greater the probability that the chart pattern will be successful. That also translated to the fact that this technical analysis indicator is more suitable for long-term trades as it supports the exploitation of recurring patterns.
Still, there are mistakes you should avoid for a more accurate analysis. That said, when a double bottom is used correctly, the results are quite impressive, but it can also be detrimental when you’re not careful. So, how does it work, and how do you even spot them?
Identify a Double Bottom Pattern
Determining a double bottom is not as difficult once you lay hold onto the fundamentals. It is one of those patterns that shows up regularly, visible, and provides a decent signal. The pattern is differentiated with its three main characteristics:
- First low – this is when the price bounces back for the first time;
- Second low – this is the second price rejection.
- Neckline – this is the temporary resistance that forms between the bottoms.
Here is the market psychology behind this formation:
- First low – during the first low, the market rebounds and creates a swing low. You may think that it’s a common retracement showing up in a downtrend.
- Neckline – during the retracement, the price reaches a point of resistance and then goes back to test the newly formed support again. The local resistance is what we call the neckline.
- Second low – bears are eager to see whether the first bottom provides enough support. If the price breaks below the first low, we don’t have a double bottom anymore. However, if the second bearish attempt fails near the support formed by the first low, then we can observe the pattern clearly. Still, it’s too early to enter the market.
- Break of neckline – once the market rejects the second low as well, the price is rebounding again. If it manages to break above the neckline, which we previously defined as resistance, then crypto traders would be interested in going long, as bulls are in control from now on.
That’s it! That is how clear and straightforward the double bottom pattern is. Here is what it looks like on the chart:
To recap, the Double Bottom Pattern (W-shaped) tells us the existing bearish trend has likely bottomed out, and the price is about to reverse.
How to Use the Double Bottom?
We have already described the main course of action, but there is more to know. For example, when you trade the double bottom, you should determine the patterns whose gaps between the lows are larger. Such patterns are likely to be spotted easily, which increases the chances of neckline breakout and thus a reversal.
So how does it work?
When trading the double bottom, most traders would enter the market right after the price breaks above the neckline, but you can try a different approach.
Instead of waiting for a clear breakout to form, you can stay calm and watch the market a bit – the price can potentially reverse lower right after breaking above the neckline. You want to see a visible strength from bulls instead of hesitation. So here is how you can proceed:
- Identify a double bottom pattern in formation;
- Let the price action break above the neckline;
- Wait for a regional pullback – this may be a chain of range candles.
- Go long when the price breaks the swing high, which coincides with the neckline.
In other words, you should not hurry to open the buy order when the price is breaking above the neckline but instead wait to see whether there is a pullback. This way, you’re making sure that when you enter the market, bulls are strong enough.
When to Use Double Bottom?
You can trade the double bottom whenever you spotted it, especially when the existing bearish trend reached the oversold level. For this, you can employ technical analysis indicators like the Relative Strength Index (RSI) or Stochastic.
A good note is that the two lows might not always be at the same level. More often, the second bottom might go lower as bears try harder to break below the previous low. But, if the price manages to bounce back from the second low, the pattern remains valid and is worthy of your consideration.
Please be wary that sometimes when such a pattern shows up, bears are trapped, as they go short right after the price breaks below the first low. That is signaling bulls because bears are demoralized when the price bounces back.
Also, when the second bottom is lower than the first one, it makes sense to check whether the pattern doesn’t form a bullish divergence with the RSI, which will be an even stronger signal for you.
What Is The Double Top Pattern?
The double top is a bearish reversal pattern that signals the end of an uptrend. It is formed by two price highs form at the same level and a neckline that acts as local support. Traders would wait for the price to break below the neckline, after which they open short positions.
Identify a Double Top Pattern
You can observe double tops quite often, though some of them might not be ideal. The pattern consists of three main elements:
- First high – this is when the price retreats for the first time;
- Second high – this is the second price rejection.
- Neckline – this is the temporary support that appears between the high.
How to Use the Double Top?
When the market reaches the overbought level, it might face resistance and form the double top pattern. It starts with the first high when the price retreats until finding local support. At this time, you can’t detect the pattern. After the first top, the price pulls back until the support (neckline) and then bounces back to test the newly formed resistance again. If the price can’t break above it, it’ll form a second high. That is when traders wary of the trend and should get ready to short when the price breaks below the neckline.
You can use the same breakout techniques as in the case with double bottoms but with inverted rules.
Are Double Bottoms and Double Tops Suitable for Crypto Trading?
Definitely yes! These two patterns are universal, and they work well in all markets, including cryptocurrency. Still, the frequency of these patterns showing up might be lower than in the forex market, for example. However, they have the same relevance once you spot them on the chart.
Cryptocurrency traders rely very much on technical analysis, and the chart patterns can provide the most powerful signals, mostly when used in combination with technical indicators. Still, crypto traders should be more cautious, given that cryptocurrencies are more volatile and unpredictable.
Double Top vs. Double Bottom: Differences
There is no fundamental difference between the Double Top and the Double Bottom, except that they are a total opposite. In other words, what’s right for bulls in the case of the Double Bottom, the same is true for bears in the case of the Double Top, as the latter is a bearish reversal signal.
The double top is made up of two highs positioned at relatively the same level and a neckline, which at this time represents local support.
When trading cryptocurrencies on large timeframes, the approach for each of the two might differ, as the double bottoms should appear more often given that the crypto market is striving to expand.
The Pros and Cons
The great thing about the two patterns is that they are effective on multiple timeframes, be it M15, H1, H4, or D1. Thus, both day traders, swing traders, and even position traders can use them. They are also universal patterns that work well with stocks, forex pairs, commodities, and cryptocurrencies.
Just like any other technical pattern, they have their metrics, but it also comes with drawbacks. The main disadvantage is that neither the double top nor the double bottom can guarantee that the newly formed trend will consolidate. For example, in the double bottom case, bears might find the courage to push prices lower for the third time and even try to break below the support. Thus, traders should use risk management tools like the stop loss.
Mistakes to Avoid
One of the main mistakes of those who trade the double bottom is to go long immediately after the price breaks above the pattern’s neckline. In this case, if you’re not cautious, you might end up trading against a larger trend. If the market is in the middle of a strong bearish move and forms a “small” Double bottom pattern, it will most likely ignore it and continue its general downtrend.
To avoid it, you should add Moving Average (MA) with period 20. If the price is below the MA, you should not buy the neckline breakout. When trading the double top, the price should not be above the MA with the period 20.
All in all, if you follow the mentioned rules, you’ll most likely succeed with these patterns even if you are a beginner. However, make sure to practice them on a demo account before trading with real funds.
While double tops and double bottoms are some of the most reliable chart patterns, they cannot guarantee trend reversals on all occasions. To avoid significant losses that may affect your entire balance, you should apply some basic techniques to mitigate risks.
The most crucial step is to place a stop-loss order, which will reduce the potential loss if the price suddenly moves against you. A stop-loss should be set between the breakout (neckline) and the resistance (in the case of the Double Top) or support (in the case of the Double Bottom).
To promote consistency and focus on the long-term goals, you should not use more than 1% of your balance per trade. That is one of the golden rules of risk management.
However, if the market is volatile and you are tempted to hit the jackpot by going all in. You might indeed be lucky for once; you will not be guaranteed the same luck in the long run if such a practice turns into a habit.
The double tops and double bottoms are some convenient and reliable chart patterns, yet their rate of success really depends on your ability to convert their signals into successful trades.
To improve your trading skills with these chart formations, you can start by practicing on a demo account or searching for the patterns on historical charts. Don’t forget to keep an eye on technical indicators, especially those measuring the overbought and oversold levels.
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