A double top is typically considered a bearish reversal chart pattern. It suggests that the upward pressure on the market has weakened, and there is increasing selling interest.

A double top is characterized by two consecutive price highs that are approximately equal in depth, followed by a reversal to the downside. The two highs are often referred to as the “twin peaks.”

The formation is complete when the price breaks below the neckline, which is a horizontal line connecting the two highs. When the price breaks below the neckline, it signals a potential downward trend.

Double Top VS Double Bottom

Double tops and double bottoms are two common chart patterns used in technical analysis to identify potential reversals in market trends. While they share similarities in their formation, they have opposite implications for traders.

A double top is a bearish pattern that signals a potential reversal of an uptrend. It is characterized by two consecutive price highs that are approximately equal in depth, followed by a breakdown below a neckline.

When a double top is confirmed, it suggests that the upward momentum has weakened, and a downward trend may follow.

In contrast, a double bottom is a bullish pattern that signals a potential reversal of a downtrend. It is characterized by two consecutive price lows that are approximately equal in depth, followed by a breakout above a neckline.

When a double bottom is confirmed, it suggests that the downward momentum has weakened, and an upward trend may follow.

How to Identify Double Tops

There are a few common steps to find a double top. However, it is important to remember that each double top might be a little different, and sometimes false signals might lead a trader to think they see one when it’s not real. Here are the steps to find a double top:

1. Look for a clear uptrend in the price chart. The price should be rising, and there should be a sense of bullish sentiment.
2. Identify two price peaks that are approximately equal in height. These peaks form the “twin tops” of the pattern.
3. Confirm the Pattern: To confirm if a double top pattern is real, make sure the price goes down more after the second peak than after the first peak. This shows that the price couldn’t break through the previous high point.
4. Neckline Formation: Draw a horizontal line connecting the two highs. This line is known as the neckline.
5. Breakout: Wait for the price to break below the neckline. This indicates a potential reversal of the uptrend.

While identifying the pattern, it is important to note these:

• The two highs of the double top should be approximately equal in depth.
• The neckline is a crucial element of the pattern, as it determines the breakout point.
• A high-volume breakout below the neckline can strengthen the bearish signal.

Trading Strategies with Double Tops

Traders often employ various strategies when encountering a double top. Some common approaches include:

Sell on Breakout

Once the price breaks below the neckline, traders may consider selling with the expectation of a downward move.

Trailing Stop Orders

To protect profits, traders can use trailing stop orders that adjust the stop price as the price moves in their favor.

False Breakout Trading

In some cases, the price may briefly break below the neckline but then reverse direction. Traders may look for signs of a false breakout and enter a trade in the opposite direction.

Trading with Technical Indicators

Additionally, traders can also use other technical indicators or oscillators to make the double top pattern more reliable. For example, traders can check the moving average convergence divergence (MACD) or relative strength index (RSI) for a bearish divergence. These indicators show a lower high when the price forms the two peaks.

Once the neckline is broken and the indicators show a bearish signal, you can sell the stock. However, be sure to follow the stop-loss and profit target rule.

Conclusion

A double top is a chart pattern that often indicates a market is turning downward. It’s formed when the price reaches two similar high points and then falls below a certain level (the neckline). This suggests that the market is losing strength and may start to go down. In addition, traders can use other tools to confirm this pattern and implement good risk management to make better trading decisions.

See more chart patterns in our glossary.