To kick things off, an illustration is in order:
Illustration © Investopedia
This image shows a representation of a double top pattern. In plain English, here's what you're seeing: after the price of Bitcoin (or any Altcoin) stock or commodity has trended upward for a while, it will form a “top,” or peak, in price. Investors, once that peak is reached, will often sell, which creates a downward trend in price. However, shortly after that, the value will rise again, reaching a second top that is usually very close in value to the one preceding it. These two “tops” represent a test of the market, to see if the current environment allows the price to be nudged higher. The downward trend from the second top shows that at the current time a higher price is not supported by the market, and it will trend downward again. This doesn't necessarily represent a permanent drop in value; it just means a higher price is not viable at the moment. The double top pattern shows a test of an upward trend, and once the pattern is fully formed, it indicates a drop in stock or commodity value. In a nutshell, the distinct “Letter M” shape of a double top represents a “bear” market, or overall downward trend in price.
Now let's take a look at the double bottom pattern:
Illustration © Investopedia
As you might expect, the double bottom represents the exact opposite of a double top pattern. Rather than testing the upper limits of a commodity's price, investors will buy and sell to see how low the value may go. This market testing comes after a downward trend in value, and—in a similar fashion to a double top pattern—two inverted peaks, or “bottoms,” are formed as that testing takes place. Of the two types of patterns discussed in this article, the double bottom is the one investors want to see. The downward trend has been tested, twice, and the “bottom” has been found—again, twice. Once this is established, investor confidence is reinforced, and the market trends upward. The “Letter W” shape of the double bottom pattern indicates an overall upward trend in the market—a “bull” market.
Both the double top and double bottom patterns indicate the reversal of a price trend that immediately precedes the pattern; a double top shows the overall value is about to drop (following an upward trend), whereas the double bottom indicates a rise in the market value (following a downward trend). Both of these patterns show that investors are testing the recent trend to see where its top or bottom might be. It's kind of a “once bitten, twice shy” pattern in market trends; investors are double-testing to see where the market might go from that point forward. In short, a double top shows a reversal in a recent upward trend in value, and a double bottom shows the price is about to rise out of a downward trend.
It should be noted double tops and double bottoms can vary in the periods of time they cover; they can take place over just a few hours, or can extend over several months. The shorter amount of time it takes to fully form one of these patterns, the more volatile the market is considered to be. Industry experts tend to recommend to investors that they base their decisions on patterns that develop over longer periods of time. Generally speaking, investors tend to buy more after a double top pattern has formed, and sell more after a double bottom.
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