Double Top - Full Explanation
A Double Top is considered a bearish signal, indicating a possible reversal of the current uptrend to a new downtrend. Sometimes called an "M" formation because of the pattern it creates on the chart, the Double Top is one of the most frequently seen and common of the patterns.
The Double Top is a reversal pattern of an upward trend in a financial instrument's price. The Double Top marks an uptrend in the process of becoming a downtrend.
A Double Top consists of two well-defined, sharp peaks at approximately the same price level. The two tops are distinct and sharp. The pattern is complete when prices decline below the lowest low in the formation. The lowest low is called the "confirmation point".
https://www.tradingview.com/x/blE4oGgW/
The slowing momentum may be evidenced through a lagging peak on an oscillator like RSI. Though not required, the market may break above the first peak, even if briefly. A slight and temporary break above the first peak is preferred as it may excite the bulls only to reverse and trend lower. The neckline is formed between the price low of the valley between the two peaks. A break below this neckline will confirm the double top pattern. The bearish confirmation is specified by a break in the key price support level (neckline) situated at the low point between the ‘tops’.
https://www.tradingview.com/x/yHpvvXoG/
Important Characteristics
Following are important characteristics for a Double Top.
Uptrend Preceding Double Top
The Double Top is a reversal formation. It begins with prices in an uptrend. The trend upwards should be fairly long and healthy.
https://www.tradingview.com/x/gFbIrHBI/
Time between Tops
Generally, the longer the time between the two tops, the more important the pattern is as a good reversal signal.
Decline from First Top
The deeper the trough between the two tops, the better the performance of the pattern.
https://www.tradingview.com/x/gmVvZQ96/
Volume
Volume tends to be heaviest during the first peak and lighter on the second. It is common to see volume pick up again at the time of breakout.
Pullback after Breakout
A pullback after the breakout is usual for a Double Top. The higher the volume on the breakout, the higher the likelihood is for a pullback.
https://www.tradingview.com/x/7scSqzn7/
Two Peaks at Different Levels
Sometimes the two peaks comprising a Double Top are not at exactly the same price level. This does not necessarily render the pattern invalid. Some analysts point out that investors should be less concerned if the second peak does not hit the high of the first peak.
https://www.tradingview.com/x/vmHJLHSb/
Trading with Double Top:
There are certain rules when trading with Double Top chart patterns.
Firstly one should see the market phase whether it is up or down. As the double top is formed at the end of an uptrend, the prior trend should be an uptrend.
Traders should spot if two rounding tops are forming and also note the size of the tops.
Traders should only enter the short position when the price break out from the support level or the neckline.
Example:
From the below example of the 15 Min chart of NIFTY we can see how bearish reversal takes places after the formation of the double
https://www.tradingview.com/x/mCZIYIex/
Stop Loss & Target :
In the case of a Double Top chart pattern, the stop loss should be placed at the second top of the pattern and can be trailed at the pullback high as price moves lower but this will be a bit aggressive.
The price target should be equal to the distance between the neckline and the tops.
Hope you all learnt from this post. Share with the community if you liked it.
Regards
Omahto
The Double Top is a reversal pattern of an upward trend in a financial instrument's price. The Double Top marks an uptrend in the process of becoming a downtrend.
A Double Top consists of two well-defined, sharp peaks at approximately the same price level. The two tops are distinct and sharp. The pattern is complete when prices decline below the lowest low in the formation. The lowest low is called the "confirmation point".
https://www.tradingview.com/x/blE4oGgW/
The slowing momentum may be evidenced through a lagging peak on an oscillator like RSI. Though not required, the market may break above the first peak, even if briefly. A slight and temporary break above the first peak is preferred as it may excite the bulls only to reverse and trend lower. The neckline is formed between the price low of the valley between the two peaks. A break below this neckline will confirm the double top pattern. The bearish confirmation is specified by a break in the key price support level (neckline) situated at the low point between the ‘tops’.
https://www.tradingview.com/x/yHpvvXoG/
Important Characteristics
Following are important characteristics for a Double Top.
Uptrend Preceding Double Top
The Double Top is a reversal formation. It begins with prices in an uptrend. The trend upwards should be fairly long and healthy.
https://www.tradingview.com/x/gFbIrHBI/
Time between Tops
Generally, the longer the time between the two tops, the more important the pattern is as a good reversal signal.
Decline from First Top
The deeper the trough between the two tops, the better the performance of the pattern.
https://www.tradingview.com/x/gmVvZQ96/
Volume
Volume tends to be heaviest during the first peak and lighter on the second. It is common to see volume pick up again at the time of breakout.
Pullback after Breakout
A pullback after the breakout is usual for a Double Top. The higher the volume on the breakout, the higher the likelihood is for a pullback.
https://www.tradingview.com/x/7scSqzn7/
Two Peaks at Different Levels
Sometimes the two peaks comprising a Double Top are not at exactly the same price level. This does not necessarily render the pattern invalid. Some analysts point out that investors should be less concerned if the second peak does not hit the high of the first peak.
https://www.tradingview.com/x/vmHJLHSb/
Trading with Double Top:
There are certain rules when trading with Double Top chart patterns.
Firstly one should see the market phase whether it is up or down. As the double top is formed at the end of an uptrend, the prior trend should be an uptrend.
Traders should spot if two rounding tops are forming and also note the size of the tops.
Traders should only enter the short position when the price break out from the support level or the neckline.
Example:
From the below example of the 15 Min chart of NIFTY we can see how bearish reversal takes places after the formation of the double
https://www.tradingview.com/x/mCZIYIex/
Stop Loss & Target :
In the case of a Double Top chart pattern, the stop loss should be placed at the second top of the pattern and can be trailed at the pullback high as price moves lower but this will be a bit aggressive.
The price target should be equal to the distance between the neckline and the tops.
Hope you all learnt from this post. Share with the community if you liked it.
Regards
Omahto
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