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Double Top and Double Bottom Patterns

Double Top and Double Bottom Patterns

A “Double Top or Double Bottom” is an important price pattern which forms just exactly as it sounds, with price reversing at least twice at roughly the same price level.  A completed Double Top or Bottom signifies that traders tried at least twice to move price through a given price level and failed.  This exhaustion of buying (or selling) often suggests that a price reversal will follow.

What the pattern signals

Pattern Type

Signal

Double Top bearish reversal
Double Bottom bullish reversal

 

Double Top and Double Bottom Patterns

Pattern time frame

A Double Top or Double Bottom pattern can play out over a very short-term time frame of a couple of weeks, to a very long-term time frame of several years.  However, there are several things to keep in mind in this regard:

  1. The longer the time it takes for the pattern to form, the more significant that particular pattern is considered to be:  A Double Bottom pattern that forms over the course of say two weeks is generally considered a valid pattern.  However, it is not considered to as strong of a formation as one that takes several months or more to form. 
  2. A Double Top (or Bottom) is just that – price touches and reverses off of the same high (or low) price two times.  There may however, also be times between the two highs (or lows) when price comes close to the high or low price without actually reaching it.  The more times price tests the high end of a Double Top pattern or the low end of a Double Bottom pattern the stronger the pattern and more significant the ultimate reversal is considered to be.
Longer Term Mid-Term Shorter-Term
6 months - 1 year + 1 month – 6 months 2 weeks-1 month

YES

YES

YES

Pattern components

There are three components to a Double Top or Bottom pattern that must be present in order to confirm the pattern has formed.

  1. First Top (or Bottom)

  2. Second Top (or Bottom)
  3. Support (or Resistance) line break
Double Top and Double Bottom Patterns

 

Looking at the price pattern alone only gives you half the picture. Volume also plays a key role in helping determine if the pattern might indeed form or is getting close to completing the pattern. The key thing to look for in these patterns is for trading volume to decline as the second top or bottom is forming.  The other key is for volume to increase when the support or resistance break occurs as confirmation that the pattern is complete and that a new trend has formed.

How a Double Top pattern forms

  1. Price in a major uptrend rises to a peak and then starts to decline, forming the first top. When price forms the first top, volume may begin to decline over the shorter term, but is generally high.
  2. Price next reaches an intermediate low and then reverses back to the upside. 
  3. Price rallies again reaching a level close to the first top with volume noticeably below the level seen at the previous top. Price then reverses once again and declines. 
  4. Price moves towards the intermediate low formed between the two tops as a test of potential support. If volume is increasing as it moves towards potential support, it alerts traders that the price level may not hold. The pattern is completed and the original uptrend is reversed when the breaks below the intermediate low and continues to lower ground.

 

Double Top and Double Bottom Patterns

 

While some traders will attempt to sell as close as possible to the second high when a Double Top appears to be forming, the pattern is technically considered to be complete when price takes out the low price established between the two highs forming the Double Top.  This is also referred to as a “support break.”

How a Double Bottom pattern forms 

  1. Price in a major downtrend declines to a trough and then starts to advance, forming the first bottom. When price forms the first bottom, volume may begin to decline over the shorter term, but is generally high. 
  2. Price next reaches an intermediate high and then reverses back to the downside. 
  3. Price declines again reaching a level close to the first bottom with volume noticeably below the level seen at the previous bottom. Price then reverses once again and advances. 
  4. Price moves towards the intermediate high formed between the two bottoms as a test of potential resistance. If volume is increasing as it moves towards potential resistance, it alerts traders that the price level may not hold. The pattern is completed and the original downtrend is reversed when the breaks above the previous intermediate high and continues to higher ground.

 

Double Top and Double Bottom Patterns

 

While some traders will attempt to buy as close as possible to the second low when a Double Bottom appears to be forming, the pattern is technically considered to be complete when price takes out the high price established between the two lows forming the double bottom.  This is also referred to as a “resistance break.”

How traders use Double Top and Double Bottom patterns to determine price targets

Some traders will attempt to use price patterns to project how far a stock or other asset may move once a given pattern is completed.  This information can then be used to project price targets.

Setting a price target using a Double Top pattern

  1. Draw a resistance line that connects the two tops in the pattern.
  2. Draw a support line horizontally across the chart at the intermediate price low between the two tops in the pattern.
  3. Measure the distance between the resistance line and the support line.
  4. Subtract that amount from the value of the support line to calculate a price target once price ultimately breaks down through the support line.

 

Double Top and Double Bottom Patterns

Setting a price target using a Double Bottom pattern

  1. Draw a support line that connects the two bottoms in the pattern.
  2. Draw a resistance line horizontally across the chart at the intermediate price high between the two lows in the pattern.
  3. Measure the distance between the resistance line and the support line.
  4. Add that amount from the value of the resistance line to calculate a price target once price ultimately breaks out and up through the resistance line.
     
Double Top and Double Bottom Patterns

Summary

Price patterns offer clues as to what other traders and/or investors are thinking and doing in regards to a given stock or other asset. A Double Top or Double Bottom pattern highlights a situation where traders on one side tried to move price decisively in their direction but were unable to sustain the trend. Once one side in the struggle between bulls and bears runs out of ammunition a reversal in price action is common.  The Double Top and Double Bottom patterns can help traders highlight this scenario.

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The information here is for general informational purposes only and should not be considered an individualized recommendation or endorsement of any particular security, chart pattern or investment strategy.

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