Double Top

Summary

Double top pattern is one of the common reversal patterns in chart analysis. 

Identify

1. Formation
   A double top pattern is composed of two similar peaks, and is formed after the price has risen to a certain stage, its shape is similar to the letter “M”. The two peaks are called the left and right peaks. When the price rise continuously, the price will reach a certain level and begin to fall. The first peak forms a lower price level from the downturn, the horizontal line at the reversal level of this downturn is called a neckline; The price rebounds upward again, but the volume contracted slightly compared with the first peak. After rebounding to the previous high, it falls for the second time and breaks through the support of the neckline. The price pattern is like the letter “M”, and the double Top is formed.
   
2. Volume
   In the process of formation, the first peak has a higher volume, and the second peak has a slightly lower volume. The trading volume showed a diminishing phenomenon, which indicates that the bullish momentum is getting weaker in the second rebound, and this implies that the upwards trend is ending. After the double top pattern formed, the price will often pull back and break through the neckline, but the movement is weak, and the neckline becomes a strong resistance.
   
3. Precautions
   1. Theoretically, the two peaks of the double top should be about the same, but in the actual market, the two peaks are not necessarily at the same height, and a 3% difference is an acceptable range. Generally speaking, the second peak may be slightly higher than the first peak, which means that there are buyers that push the price upwards. However, due to lower transaction volume, buyers failed to push the price above the first peak. If the second peak exceeds 3%, more capital will enter the market, and the double top pattern will evolve into an upward-ranging pattern.
   2. When the first peak is formed, the first low of its fall is about 10%-20% of the first peak.
   3. Sometimes, the double top pattern may not necessarily be a reversal signal. If it does not fall below the neckline for a long time, it may evolve into a consolidation pattern. This can be determined by how long it takes to form the two peaks. The larger the time interval, the higher the effectiveness. Usually, the time interval between the formation of two highs is longer than one month, but if the time interval on the daily chart is longer than half a year, this pattern may fail.
   4. During the formation of a double top pattern, you may observe a higher trading volume. The volume of these two peaks will also be sharp and prominent, forming two peaks in the volume indicator. However, the volume of the second peak contracted significantly compared to the first peak, reflecting the weakening of the buying power of the market. If the second peak volume increases instead, the double top pattern may fail.
   5. A double top pattern usually can be determined when two peaks are formed and the price effectively breaks below the neckline. After that, the price will pull back and a breakout for a short time, but the neckline will become its resistant. At the same time, the pullback does not depend on the trading volume.
      
4. Application
   1. Selling Level
      The double top pattern has two selling entry points. The first entry point is the second peak turning point, where most aggressive bear traders enter the market. This is the best selling entry point of a double top, traders who sold here can be called a “precedential trader”. The second selling entry point of a double top pattern when price breakout the neckline. Conservative traders will wait for the price to break the neckline to confirm double top pattern formation. After the price breaks the neckline, it indicates that a larger round of downward trend is coming.
   2. Take Profit Level
      The profit target level will be the distance from the peak to the neckline.