Double Top Pattern: Overview, Components, How To Trade and Examples
The neckline serves as an important support level and a break below this critical level signals a possible trend reversal. The double top stock pattern is formed when the market makes two consecutive peaks at the same price level, which are known as the «twin peaks». The two tops in the double top pattern are indicators of resistance in the market. From a different perspective, it means that the market tested the same resistance level twice and was rejected both times. Success with Double Top patterns requires discipline to wait for complete formation, patience to allow proper volume divergence to develop, and the wisdom to consider broader market context.
- The formation of this pattern is completed when the prices move back to the neckline after forming the second peak.
- The price then rallies to a second top, usually at the same level as the first, reinforcing resistance.
- So, you need to be prepared for the worst-case scenario by setting a stop-loss order in advance to avoid unnecessary losses if the market goes against you.
- The fifth component is the support trendline (neckline) which is a horizontal support line drawn through the lows of the trough that separates the two peaks.
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Triple Top Pattern in Forex Trading: Identification and Interpretation Guide
- The double top pattern differs from other types of chart patterns in its structure and the reversal signal it provides.
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- A double top pattern stock market example is illustrated on the daily stock chart image of Zoom Video Communications Inc (ZM) above.
- This in itself begets more selling pressure, as has been described earlier, and fuels the new bearish trend.
Volume frequently rises when the price breaks below the neckline and decreases throughout the creation of the two peaks. Instead of watching the market swing into support, having a larger stop loss, and then with the possibility that it could just swing back in the opposite direction. Now, your stop loss has a shorter distance, compared to your original one where you place it above the tops. Our over 15 years of experience in financial markets and high technical knowledge aid in precise and timely identifications.
A price break below the double top pattern’s neckline indicates that selling pressure is now dominant. The price break confirms the bearish reversal, attracting more sellers and increasing the trading volume. Traders use the double top chart formation in Forex, Stocks, Cryptocurrencies and Commodities trading to enter short positions, anticipating further price declines as the pattern unfolds.
A positive divergence between price and indicators like RSI suggests that selling pressure is weakening, increasing the likelihood of a reversal. It can also be placed below the second bottom and the breakout candle of the resistance level to reduce risk. Following a strong bearish double top pattern rules move, the pattern is confirmed when two nearly equal lows appear, separated by a peak in the middle. Afterward, a pullback creates a trough, showing a temporary loss of bullish momentum.
Double top chart pattern strategy (backtest and example)
That is when identifying the pattern and using the other strategies discussed below can come in handy. An example of this would be price moving up to the second test and forming a false break pin bar or a large engulfing bar. You can read the price action and use high probability price action entry triggers to confirm that price is going to form a double top or bottom.
The double-top pattern is interpreted by traders and analysts as a bearish indicator. It implies that the upward trend has slowed down and that a price decrease is more likely. Market conditions, timescale, the degree of pattern formation, and the presence of confirming signs or signals all affect the success rate.