The double top pattern is a twin-peak chart pattern representing a bearish reversal in which the price reaches the same levels twice with a small decline in between the two peaks. A double top pattern usually signals an intermediate or long-term change in trend. When identifying the pattern, traders need to understand that the peaks and troughs don’t have to form a perfect M shape for the pattern to emerge.
Before the pattern starts to emerge, there is a considerable uptrend spanning across many months. The first top is the highest value the trend has reached during the current trend. After the first top, there is usually a price recession of 10 to 20%. This decline in asset value is generally insignificant; however, the fall can sometimes be prolonged due to a decrease in demand.
The movement towards the second peak usually takes place with a low volume. Once the value reaches the first peak level, it resists moving upwards. It may take the price 1-3 months to reach this level. A difference of 3% between the two tops is usually acceptable. After the second peak, there should be an increase in volume accompanied by an accelerated decline.
At this stage, the double top still needs to be confirmed. For this purpose, the trend should break the lowest point between the two peaks accompanied by acceleration and an increase in volume. To set a price target, traders should subtract the distance from the break to top from the breakpoint. If the gap between the peaks is too small, then the pattern may not indicate a longer-term change in asset price.
Understanding the Double Top Pattern
Some people argue that the hardest part of trading chart patterns is recognizing them when they happen. Double tops make this easy, but there are rules to help with the process. Otherwise, this indicator can lead to fake outs or misunderstanding the reversal trends. Although there are variations, the classic double top pattern marks a change in trend from bullish to bearish. There is the potential for many double top patterns to form throughout the chart, but until that key level of support is broken, the reversal pattern cannot be confirmed and should not be acted on.
The most important aspect of the double top pattern is to avoid pulling the trigger on a trade too early. Any investors should wait for the support level to be broken before jumping in. It is not uncommon for a price or time filter to be applied to differentiate between confirmed and false support breaks.
Attributes
- Pattern type: Reversal
- Indication: Bearish
- Breakout confirmation: The confirmation for this pattern is when there is a close below the lower trendline drawn horizontally across the intervening low between the highs with above-average volume.
- Measuring: Take the distance between the two highs in the low, and then subtract that from the breakout level.
- Volume: The volume declines during the formation, expanding on the breakout.
Conclusion
A double top reversal pattern typically occurs after a failed move to the upside. It signals that the market is unable to break through the upper resistance level. When the pattern occurs, traders should refrain from taking long positions; instead the focus should then be put on finding a bearish entry point. To learn more about stock chart patterns and how to take advantage of technical analysis to the fullest, be sure to check out our entire library of predictable chart patterns. These include comprehensive descriptions and images so that you can recognize important chart patterns scenarios and become a better trader.
