The way mountains have tops or peaks so does the pattern in a chart. In a mountain range when we see multiple tops then it is quite natural to see those tops being followed by a downward trajectory and a descending line. Multiple tops or to be specific “double tops” are quite common in chart patterns. A double top is basically a “reversal pattern” that is formed after there is an extended move upwards. Those tops look like mountain peaks. After reaching the tops, the price will retreat slightly and then will make a move upwards to test that level again.
You will notice that there are two “peaks” in the chart in a very strong upward move. But here the second peak was not able to break the level of the first peak. This is a very important and strong sign that a potential reversal is in the cards. In technical terms, it means the buying spree is coming to an end. In this situation, it is recommended to place the entry order below the neckline because we are anticipating a reversal of the upward trajectory.
The graph shows price breaking the neckline and making a move down
A double bottom is also a trend reversal formation. But this time instead of buying, we are looking to sell. This kind of formation occurs after an extended downturn when instead of mountains, valleys have formed. In other words, if you put the two top formations upside down then you will see the double bottom formation.
If you look carefully, you will notice that there are two “valleys” in the chart in a very strong downward move. But here the second bottom was not able to break the level of the first bottom. This is a very important and strong sign that a potential reversal is in the cards. In technical terms, it means the selling spree is coming to an end. In this situation, it is recommended to place the entry order below the neckline because we are anticipating a reversal of the downward trajectory.
