Understanding Double Tops and Bottoms in Crypto Trading
Cryptocurrencies are highly volatile, which makes understanding chart patterns a valuable art in crypto trading. The cryptocurrency charts provide a lot of information, so they may not be entirely helpful without proper analysis. Seasoned traders use them to gain insight into current market trends and identify opportunities for entry and signals for an exit.
Crypto investors need to dedicate some time to understanding particular patterns around the crypto coins in their portfolios. Reversal patterns are a common occurrence and can be broken into double tops and bottoms.
The Double Top Pattern
The double top pattern is a frequently occurring chart pattern that is, in most cases, an indicator of a bear reversal. It signifies the end of an upward trend in a coin’s price due to resistance or exhaustion and the beginning of a slight downward trend. The movement results in an inverted U-shape in the first top and a subsequent similar pattern to form an M-shape.
Ideally, the double top pattern occurs when the price of a coin tries to beat a certain resistance level, but the attempt turns unsuccessful. The price then moves down a little before moving up again to make a second attempt. The attempt is also unsuccessful, and the price goes into recession again.
The double tops do not have to assume a perfect M-shape. When the first top occurs, the second top usually rises slightly below the first high. At this time, traders withdraw their final profits as they foresee an end to the bull market.
Double Bottom Pattern
The double bottom pattern is usually the opposite of the double top trend. Investors in this period usually value the HODL strategy whereby they invest in an asset and hold a long position waiting for the bull rally and profit from the rising prices.
The bottom pattern occurs at the end of a bear market when the prices fall to an extended low known as the support level. The price then rises to the point of resistance known as the neckline before it drops down again to test the support level. If the trend breaks the support level, then there is no double bottom.
Essentially the price should fall to a point close to the first low, but the trend should not break the support level. The price starts to rise again, although it is still early for investors to acquire the asset. However, if the trend goes above the set resistance level or above the neckline, it signifies the beginning of a bull market, and investors can start going long.
The Difference Between a Double Top and a Double Bottom Pattern
The essential difference between the double top chart pattern and the double bottom pattern is that they are exact opposites of each other. The patterns are usually opposite of each other, where the double top pattern forms two highs that are almost the same level, and thus its association with the M-shape.
On the contrary, a double bottom has two lows relatively at the same level and is therefore associated with an inverted M-shape or the letter W. The double top represents a highly bearish market trend that is most likely to decline in the asset price. On the other hand, a double bottom represents a bullish market, resulting in a sharp rise in the price.
Can you Rely on Double Tops and Bottoms for your Trading Strategies?
Double top and bottom charts are universal patterns and powerful signals in the cryptocurrency space. The charts can be excellent trading tools, more so when used along with technical indicators. They work well during different timeframes and are therefore suitable for position, swing, and day traders.
However, neither of them guarantees the anticipated trend. For instance, the double top can assume the pattern again and even break the previous highs. Likewise, the double bottom trend can assume the third low and even break the support level.
Therefore, traders should not be too quick to go long right after the price breaks the neckline during a double bottom. Investors can integrate basic techniques such as stop-loss orders. The stop-loss order protects them from potential losses if the prices move against their expectations.
The double top and bottom patterns occur pretty often on cryptocurrency charts. They may appear as apparent patterns due to their frequency of occurrence, although executing them in real-time and earning profits can be quite a challenge. Many traders prefer to place a limit order in support of the double top and bottom, indicating that they are leaving the market early.
Institutional traders already mastered this trend of small investors and can use it to their advantage. The small traders are forced out of the market after experiencing frustrations in their positions, making them miss out on profits.
Chart patterns are formidable tools for every trader. Investors should learn to use them wisely and adopt indicators to add a layer of certainty in the positions they take. Above all, they should be patient and avoid taking positions right after consecutive tops or bottoms.