Bitcoin Futures Trading: Understanding Double Top & Double Bottom Patterns
Trading with assets such as cryptocurrencies requires you to know about the basics of Technical Analysis, of which double top and double bottom patterns are really important aspects. These are trend reversal indicators that feasibly change the flow of an asset’s price action.
And such trends are often observed in Bitcoin trading charts when you trade on cryptocurrency exchange platforms like C-Trade, which offers super-fast withdrawals and industry-leading leverage rates of 150x, along with the best reward program in the market.
Now, Double top and double bottom patterns are easily identifiable market trend indicators that are extremely common and symbolize the collective sentiments of traders. These patterns occur in the chart when the underlying crypto asset, in this case, Bitcoin’s price, moves in a pattern similar to the letter “M” (for the double top) or “W” (for double bottom) and indicates temporary extremes.
- A double top pattern has an “M” shape and indicates a reversal trend that is bearish.
- A double bottom pattern has a “W” shape that signifies a bullish price movement.
What is Double Top Pattern?
Source: Forex School Online
A double top pattern is a reversal pattern that is formed by two consecutive rounding tops after there is an extended move upwards. The first rounding “top,” which are the peaks, forms an upside-down “U” pattern when the price hits a particular level that can’t be broken. The price comes slightly down after hitting this level but again returns back to test the level. If the price gets rejected again from that level, then you get a double top.
The rounding tops in double top patterns often indicate a bearish reversal as they occur more after an extended bullish rally. If a double top pattern is seen, the second rounded top will generally be slightly lower than the first rounded tops peak, thereby indicating exhaustion and resistance.
They can be rare occurrences with their formation usually indicating that investors are looking to obtain final profits from a bullish trend. Double top patterns often lead to a bearish reversal trend in which traders are able to profit from selling the crypto asset on a downtrend.
Source: Cryptopurview.com
In the chart given above, you can see that the second top is not able to break the high of the first top. This indicates strongly that a reversal is about to happen as the buying pressure is almost finished.
Always remember that double top patterns are the formation of a reversal trend so you need to look for these after you notice a strong upward trend. Once the double top pattern is formed, traders can palace their entry order below the neckline as they’ll be anticipating a reversal of the upward trend.
What is a Double Bottom Pattern?
Source: Cabot Wealth Network
A double bottom pattern is exactly the opposite of a double top one, as results from this pattern have opposite inferences where instead of looking to go short, we go long. It is a technical analysis charting pattern that indicates a reversal trend in the price action of Bitcoin. When Bitcoin traders see a double bottom pattern, they safely anticipate a price action that is bullish in nature.
These formations happen after extended downtrends when two bottoms called “double bottom’ are formed. Formed by the first bottom or “U” pattern followed by another bearish comeback on similar levels, they collectively make a “W” pattern.
Just like the double top patterns, the double bottom pattern is also usually used with other indicators.
Source: Cryptopurview.com
As you can see from the above chart, after the previous downward trend, the price formed two bottom patterns as it wasn’t able to dive below a certain level, thus indicating the formation of strong support at this level.
You can notice that the second bottom wasn’t able to substantially break the first bottom, which indicates that the selling pressure is almost finished and that a reversal is about to happen.
Additionally, the formation of double bottoms from two rounding bottoms (which typically occur at the end of a continual bearish trend) also tells us that investors are following the crypto asset, i.e., Bitcoin, to capitalize on its final push towards a lower support level. These patterns can generally indicate a bullish reversal trend which provides traders and investors the opportunity to gain profits from this bullish rally.
Trading in Double Top & Double Bottom Patterns
Trading bitcoins in the double top and bottom trends can be tricky, and therefore you must know when to enter them and when not to.
- Double Top Pattern - When entering the market with a double top pattern, check the conditions as a double top is not a fakeout generally when the market is at the end of a bull run.
After checking the conditions of the market, you should identify a double top pattern and take note of the size of the tops and the neckline. Also, you can open a short position at the support in case of the price action retests after breaking out from the “support turned resistance.”
You should avoid entering in smaller time frames, usually lower than an hour, as a double top is generally a fakeout at the time. A double top exists during long time and space intervals between two tops. Although during a strong market uptrend, a double top pattern may turn out to be a fakeout, therefore avoid a short position from the top.
In addition, always use DCA (Dollar Cost Averaging) as there exists a certain level of volatility when dealing with assets like cryptocurrencies. Also, you should avoid loss or liquidation during fakeouts by entering a short position only after it breaks out of the trendline. Keep the stop loss just above the first local resistance that is above the neckline. - Double Bottom Pattern - Double bottom patterns don’t often turn out to be a fakeout when the market is in a bullish mode or a crossover of it. You should enter in a long position or buy the asset only when you notice a sudden rise in trading volumes before the breakout. And remember to only enter during a confirmed breakout.
In case you don’t get an entry, you may obtain a second chance of entry if the price action retests from the neckline of the support turned resistance.
As mentioned in the double top pattern as well, don’t enter in a double bottom position during smaller time frames which are usually less than one hour, as they’re generally smaller pumps or fakeouts. Also, do not enter in the last run of the second trough since it is crucial to confirm first.
Apart from all the technical analysis of the asset, it is important to check the condition of the market. Similar to double top patterns, keep your stop loss lower than the first local support below the neckline level.
Conclusion
When identified correctly, double top and double bottom pattern formations are highly effective, but they can be detrimental when interpreted wrongly. Therefore, you must be supremely careful and patient before making any conclusions.
For example, there is a big difference between a double top and double bottom pattern. An authentic double top pattern is a technical pattern that is extremely bearish, which might lead to a huge sharp decline in an asset such as cryptocurrencies.
Basing a double top or bottom solely on the formation of two consecutive peaks or troughs respectively could lead to a false conclusion and may cause an early withdrawal from a position. That is why it is crucial to be patient and spend time identifying the critical support level when confirming a double top or bottom’s identity.
As mentioned before, double top and bottom patterns are very important Bitcoin trading indicators as they show reversal patterns, and when identified and traded at the right moment, can generate substantial amounts of profit on your Bitcoin trade.
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