Double tops and bottoms

Two attempts, one answer

A double top is one of the simplest reversal patterns: price tries to break above a high twice and fails twice. A double bottom is the mirror image — two failed attempts to push below a low. Because they are simple, they are everywhere — and that is exactly why you need strict rules for confirming them.

The key idea: a double top is not "two peaks". It is two peaks plus a close below the low between them. Until that low breaks, all you have is a range.

This lesson reuses the vocabulary from the chart patterns lesson — neckline, measured move, retest.

Double top

Anatomy

1. An uptrend reaches a peak (peak 1), then pulls back to a low — this low is the neckline.
2. A second rally to roughly the same price (peak 2). "Roughly" means within a few percent; the second peak can be slightly higher or lower.
3. A decline that closes below the neckline. That is the confirmation.

On the chart, peak 1 is $150 and peak 2 is $149.6 — a 0.3% difference. The low between them is $140.

Psychology

At the first peak, buyers who chased the rally meet profit-takers. The pullback looks normal. On the second rally buyers return, but with less force — the volume on peak 2 is clearly lower than on peak 1 (the amber bars). Sellers who remember $150 sell again. When price drops through $140, everyone who bought between $140 and $150 is underwater, and the structure now has a lower high and a lower low.

Measured move

• Height = $150 − $140 = $10.
• Target = $140 − $10 = $130.

On the chart, price broke $140, came back to test it from below (the retest), failed, and has fallen to $134 so far — the target hasn't been reached yet, and it may never be.

What we do with it

As with every bearish pattern in this course: we don't short. A confirmed double top means:

• if you hold the stock, exit or cut on the close below $140, or at the latest on a failed retest;
• if you were planning to buy, wait — a double top cancels the "buy the dip" idea;
• if you hold for the long term and still like the business, at least tighten your stop and don't add.

Double bottom — the buy setup

A double bottom (a "W") forms after a decline: two lows near the same price with a peak between them (the neckline). It is confirmed by a close above the neckline.

Worked example:

• Lows at $50 and $50.4; neckline at $58. Height $8 → target $58 + $8 = $66.
• After the second low, and before the breakout, price made a higher low at $55.5 — a sign of buyers stepping in earlier.
• A breakout on high volume, then a retest of $58 from above.
• Entry $58.5 on the retest; stop $55.3 below the higher low.
• Risk $3.2, reward $66 − $58.5 = $7.5 → about 2.3R.