TL;DR: A double bottom is a W-shaped pattern with two lows at roughly the same level and a resistance (neckline) between them. A double top is an M shape with two highs at roughly the same level. The pattern is only confirmed by a break of the neckline, and fails regularly.
What can you expect?
- Time per week
- About 3 to 6 hours a week for looking at charts, planning and reviewing. More if you trade daily.
- Starting capital
- No fixed minimum. With small amounts, order costs and spread weigh heavily. Only use money you can afford to lose, and never risk more per trade than you decided in advance.
- Typical setbacks
- False breakouts, strings of losing trades, gaps that run past your stop-loss and patterns you only recognise afterwards.
- Costs
- Order costs, spread, currency costs on foreign shares, financing and overnight costs on leveraged products, and possibly the cost of price data. Compare the costs of several brokers.
- Not suitable if…
- People who want to play it safe, cannot bear losses or have no time to keep track of their trades. Beginners are better off practising in a demo first.
How it works
A double bottom forms after a fall: the price makes a low, rises, tests that level again and then breaks above the resistance in between (the neckline). A double top is the mirror image after a rise. It is a classic pattern in technical analysis. The pattern is only confirmed once the price breaks the neckline, and even then it can fail. Calculating a 'price target' from the height of the pattern is a rule of thumb, not a forecast. This is education, not investment advice.
Core principles
- 1. Two lows or highs at roughly the same level
- 2. The pattern needs a prior trend that it can reverse
- 3. Only a break of the neckline confirms the pattern
- 4. A break on higher volume is more convincing, but no guarantee
Step-by- step plan
- 1
Look for a prior trend
A double bottom needs a fall to reverse, a double top needs a rise. Look for a clear trend of several weeks to months. Without a trend, there is nothing to reverse.
- 2
Mark the first low and the resistance
Mark the first low and the peak that follows. That becomes the neckline. Note the volume if you use it.
- 3
Check the second low
The second low lies at roughly the same level as the first. Do not be too strict: small differences are normal. Let the pattern form rather than anticipating it.
- 4
Wait for the break and plan your trade
Only enter after a close through the neckline. Decide in advance your entry, stop-loss, price target and position size, and calculate the ratio between risk and reward.
- 5
Manage and review the trade
Stick to your stop-loss and your plan. Record the trade in a journal and later review which patterns worked and which did not. Test new approaches first on historical charts or with a demo.
In detail
What the pattern shows
After a fall, the price makes a low. It then rises to a resistance, drops back to roughly the same level and rises again. The thought is that at the second attempt sellers cannot push the level lower. That is an explanation after the fact, not a certainty.
A double top is the mirror image: two highs at roughly the same height after a rise, with a support between them. If the price breaks below that support, the pattern is confirmed.
The neckline and the price target
The neckline is the level between the two lows (for a double bottom the resistance, for a double top the support). Until the price breaks through it, the pattern is not confirmed. Many patterns fail because the price turns around at the neckline.
A rule of thumb for the price target is the height of the pattern, measured from the neckline. That is not a forecast: the target is often not reached. The worked example below shows how to calculate it.
Volume, time and other confirmations
Many traders look at volume: lower at the second bottom, higher at the break. The time between the lows (usually a few weeks to months) and a divergence between price and an indicator such as the RSI are also used. Such confirmations can help avoid weak patterns, but they guarantee nothing. There is no fixed number at which a pattern does or does not work.
Risk and the relation to your target
The stop-loss usually sits below the lowest point of the pattern. With a wide W, that can be far below your entry. The risk can then be larger than the profit to the price target. Calculate this in advance, and set your position size so that a loss stays within your maximum risk per trade.
If you use leveraged products, the risk of fast, large losses and financing costs come on top.
- Able to recognise trends, support and resistance
- Basic knowledge of volume and stop-loss orders
- A fixed plan for risk per trade
- Charting package with volume
- Spreadsheet or position-size tool
- Trading journal
- 01 Look for two lows at roughly equal height after a fall
- 02 Draw the neckline through the peak between the two lows
- 03 Only enter after a close above the neckline
- 04 Check whether volume at the break is above average
- 05 Calculate your risk and position size in advance
- 01 Place a stop-loss below the lowest point of the pattern (or below the neckline)
- 02 A common price target: the height of the pattern above the break point
- 03 You can close part of the position at an interim target
- 04 Close or review the position if the price falls back below the neckline
Worked example
Made-up worked example (not advice, not a forecast). A share falls and forms two lows around €40. The peak in between, the neckline, is at €50. After a close above €50 you enter at €50.50. You set your stop-loss at €39 (just below the lows).
Formulas:
- Pattern height = neckline − low = €50 − €40 = €10
- Price target (rule of thumb) = neckline + height = €50 + €10 = €60
- Risk per share = entry − stop = €50.50 − €39 = €11.50
- Reward per share = target − entry = €60 − €50.50 = €9.50
- Reward / risk = €9.50 / €11.50 = 0.83
Here the possible loss is bigger than the possible gain. That is no reason to buy. You can skip the trade, or wait for an entry closer to the stop.
Position size: if you want to risk at most €100, that is €100 / €11.50 = 8.7, rounded down to 8 shares. A loss at the stop is 8 × €11.50 = €92. The target would yield 8 × €9.50 = €76. Spread, order costs and a gap through your stop come on top. The price target is often not reached.
Hypothetical example, not advice.
Work it out yourself
Risks and risk management
- False breakouts: the price returns below the neckline
- Patterns are easier to see in hindsight than in the moment
- The price target is often not reached
- The stop-loss can be far from entry, making the ratio between risk and reward unfavourable
- Gaps and fast moves can run past your stop-loss
- Costs (spread, order costs) and financing costs on leveraged products
- In crypto and small shares, patterns are less reliable because of large swings
Learn the basics
Key takeaways
- The double bottom and double top are classic patterns. They point to a possible reversal, not a certain one.
- Only a break of the neckline confirms the pattern. Anyone entering earlier is trading on an expectation.
- Work out in advance your risk relative to your price target. A distant stop-loss can make the ratio unfavourable.
- Patterns fail regularly. So limit your risk per trade and test your approach first on historical charts or in a demo.
Frequently asked questions
How reliable is the double bottom? +
There is no fixed reliability. Patterns fail regularly, and what is quoted as 'reliable' depends on how the pattern is defined and measured. Treat every pattern as a candidate and limit your risk per trade.
How do I calculate the price target? +
A rule of thumb: measure the height between the lowest point and the neckline and add it above the neckline. Lows at €10 and a neckline at €14 give a height of €4 and a target of €18. The target is often not reached, so plan with a stop-loss and a cautious expectation.
Does this pattern also work on crypto? +
You also see the pattern in crypto, but price swings are bigger there and false signals are more frequent. Crypto is a very high-risk product with no deposit guarantee. With leverage you can lose more than your deposit. So use wider distances and a small position.
Origin
General technique