Sentiment: Bearish
Direction: Reversal
What Is The Double Top Chart Pattern?
A Double Top is a bearish chart pattern, commonly found at the “top” of a trend ahead of a reversal.
A double top resembles a “M” shape and includes two roughly equal sized peaks.
The reversal is typically confirmed with a break of neckline support.
How To Identify The Double Top Pattern?
Price action meets a resistance trendline two times to form consecutive peaks roughly equal in size.
These peaks are separated from one another by a trough that meets support. This results in a “M” shape.
What Is The Psychology Behind The Double Top Pattern?
The Double Top pattern is a bearish chart pattern that can provide traders with valuable insights into the market’s psychology.
It’s characterized by two consecutive peaks (the tops) of approximately the same height, with a trough in between (the bottom).
The pattern typically takes several weeks or months to form and is a sign of a potential trend reversal.
Traders interpret the pattern as a sign of a transition from a bullish market sentiment to a bearish market sentiment.
The pattern represents a period of indecision in the market, where buyers and sellers are evenly matched, but ultimately sellers gain momentum and push the price lower.
The psychology behind the double top pattern is that the first peak represents a period of strong buying pressure, where buyers are in control and pushing the price higher.
However, sellers eventually step in and push the price lower towards the trough.
The trough represents a period of indecision in the market, where buyers and sellers are unsure of the direction of the trend.
As the pattern continues to form, the price moves higher again towards the second peak.
The second peak represents a retest of the previous resistance level, where sellers are in control and pushing the price lower again towards the trough.
Once the price breaks below the trough, it’s a signal that the trend has reversed, and traders may enter short positions.
Encyclopedia of Chart Patterns (Wiley Trading)
21% OffHow To Trade The Double Top Pattern?
To trade the Double Top pattern, traders typically wait for the price to break below the trough with a strong volume surge.
The breakdown should ideally occur on higher than average trading volume, as this confirms that there is significant selling pressure behind the move.
Traders may enter a short position once the price breaks below the trough, with a stop loss placed above the second peak.
The profit target can be set based on the height of the pattern, with the expectation that the price will move at least the same distance as the pattern’s height in the direction of the breakout.
Alternatively, traders may wait for a pullback to the trough before entering a short position.
This approach can provide a better risk-to-reward ratio, as the entry price is closer to the trough, and the stop loss can be placed tighter.
However, it may also result in missing out on some of the initial gains from the breakdown. Ultimately, the best approach will depend on the trader’s risk tolerance, trading style, and market conditions.
It’s worth noting that the double top pattern can also result in a false breakdown, where the price briefly breaks below the trough before reversing course.
Traders should be aware of this possibility. Also be sure to use technical indicators and other tools to confirm the validity of the breakout. Access these tools at TradingView.
Double Top Performance Expectations Explained
A bearish pattern is expected to emerge as soon as the support is breached.
However, the potential target can vary from 43% to 64% depending on the nature of the troughs (Adam or Eve).
To calcuate, measure from the bottom to the top trendline and then project your measurement.