What is a Double Top reversal?

What Is a Double Top Formation?



Double top is a very common pattern which indicates a change in the trend will happen soon. This reversal patterns is formed when a price makes a high two consecutive times with a decline between the two. It is a reversal, and not continuation, pattern as the trend had been bullish for a while as the price is obviously hitting resistance.

 

It is called a “double top” because an asset reached a peak in the same area twice, without being able to move above that resistance area (see picture below).

 


When the price drops below the first pullback low (neckline), the pattern is activated. For example, if an asset reaches a high of $100, pulls back to $85, rallies to the region of $100 again and ultimately fails, the drop and break of the $85 support translates into activation of  the pattern.

 

The next step is to enter a short trade and set a stop-loss above the previous support, now acting as a resistance. In this case, that would be $85. Any move and close above that level invalidates the pattern.


The take-profit is measured as a distance between the peak and the neckline, and then copied from the neckline and then further south, where the end of the trend line indicates a place where the pattern is completed.

Double top is not as easy to identify correctly. If they get misinterpreted, which happens often, they can be very detrimental as traders tend to enter into trades before the pattern is confirmed i.e. the neckline is broken. However, if interpreted correctly, double top formations can be very effective ways to make profit.