Price Action: Double Tops and Double Bottoms (Part 2)
Source: Dev.to
Testing and Failure
- A double top occurs when the market tests the same resistance (previous high) twice.
- A double bottom occurs when the market tests the same support (previous low) twice.
If the double top fails, price typically continues upward; if the double bottom fails, price usually continues downward.
Measured move: Once the neckline is broken, the target is projected at a distance equal to the height of the double top or double bottom.
The First Reversal in a Strong Trend Is Usually Minor
In a strong bear trend—characterized by breakouts or very narrow channels—the first bounce often turns into a short‑term trading range or a bear flag.
- Bears tend to keep their positions with wide stops, resulting in a poor risk‑reward ratio but a high win rate.
- For bulls to achieve a true reversal, they must push price back to the prior low for confirmation, forming a major high/low with at least 10 bars and a two‑leg structure.
The Importance of Confirmation
The market constantly seeks confirmation:
- After a strong decline, the initial bounce usually stalls well before reaching the previous high.
- Only when price returns to the prior low and buying pressure reappears does the reversal gain acceptance.
Typical Scenario of Transition from Bull to Bear
- Initial bull trend breaks down, falling below the bull trend line and channel.
- Bulls rally, retesting the same price area.
- The market declines again, repeats the test, and declines once more, establishing the level as strong resistance.
Key observations
- Bulls often buy at each rally peak, hoping the decline is minor and that they can exit at breakeven.
- When the decline persists, they interpret it as weakening bullish momentum and may exit, using the test of the prior high as a signal.
- Bears open positions simultaneously, anticipating not just a minor pullback but a double top or a major trend reversal.
Note: A double top does not require the two highs to be identical; it only requires that the same price area is repeatedly rejected.
Trading Range: Buy and Sell Signals Coexist
After a trading range lasting 20+ bars, the odds of an upside breakout and a downside breakout are roughly equal. Within the same chart you can find:
- Buy signals: double bottoms, bull flags.
- Sell signals: double tops, bear flags.
A failed double top or double bottom often triggers an immediate measured move in the opposite direction, creating a “two‑leg” move.