If you are involved in trading and familiar with technical analysis, you may hear the term double top pattern a lot. In technical analysis, traders use various chart patterns to understand price movements and take their trading decision based on them. A double top is one of the popular and commonly used chart patterns used by traders to understand market movements.
A double top is a reversal chart pattern that is mostly found at the end of the uptrend. Like any other reversal chart pattern double top pattern also indicates the reversal of an uptrend. At the end of an uptrend, when the price reaches a level and declines to go further upward for once, an M-shaped pattern creates in that particular rejection zone known as a double top reversal pattern. Double Top pattern is an extremely bearish chart pattern because when it is found at the end of the uptrend, there is a high probability that the strength of the uptrend is low, and it may reverse, and there could be a new start of the downtrend.
What information a trader can get from the double top pattern?
A double top pattern indicates the probability of a short-term or long-term change in the uptrend of a financial instrument. A trader can identify a potential top of an uptrend from this reversal pattern. The idea behind the double top pattern is when the price of a financial instrument denies from a level two times, it means this level can hold, and there are not enough buyers in the market to push the price higher. So in other words, there is some resistance in that particular zone.
Another important thing about this pattern is that it is not necessary for a double top pattern to get rejected from the exact same price point. It can be rejected from the same price zone, which means the second top of the pattern is not rejected from the exact price point of the first top but is rejected from almost the same price level.
Characteristics of a double top pattern
To understand the pattern very well, here we will talk about some basic characteristics that every double top pattern follows which help you identify the patterns in the chart and act accordingly. To give an illustration of the pattern, let’s see the picture below.
To form a double top pattern, there must be a previous uptrend. The double top pattern generally forms at the end of the uptrend. When the initial movement of the uptrend is rejected at a price point, it will create the first top. After the first top is being formed, the market makes a pullback towards the downside. Then the price will try to go towards the upside again, but it will face resistance in the zone where the first top was formed. Before forming the second top, it forms the neck of the pattern, and a straight line drawn through the neck is called the neckline.
A common misconception among the new traders is that a double top pattern is tradable just after the second top form. You can’t make your decision just after seeing the second top because you don’t know whether the price point of the second top will hold. A double top pattern formation is confirmed only when the price crosses the neckline towards the downside after forming the second top.
Look at the arrow in the above picture. When the price crosses the neckline, you can make your trading decision based on this pattern.
An advance way for the confirmation of the double top pattern:
Many experienced traders don’t make trading decisions just after the price crosses the neckline. They wait for the pattern to show more confirmation which is known as a retest of the neckline. After the price crosses the neckline, it will go towards upside again. It will face resistance in the neckline and will be rejected from the neckline. This retest of the neckline is very important to professional traders because this neckline previously worked as a support, and now this is working as a resistance.
It is important to remember while dealing with support and resistance is when a previously confirmed support is working as resistance will be more powerful because this level showed its importance earlier. So when the price gets rejected from the neckline again, professional traders can be 100% sure that there aren’t enough buyers to push the price towards the upside, and the price will surely fall. Then they take their trading decision based on that. Another key point to note is that every double top pattern will not give a neckline retest. So you can wait for the perfect double top pattern with neckline retest or you can trade without the neckline retest.
Double top pattern with divergence:
When the technical indicator of a financial instrument is moving in the opposite direction of the price, is called divergence. Technical indicators used to identify divergence are RSI (Relative strength index), MACD (moving average convergence divergence), and few other oscillators. Divergence indicates that the running trend is weakening and it can reverse. In the case of a double top pattern, the price will make an almost similar high, but in the indicator window, you will see the indicator is making a lower high. An image is attached below to give you a clear idea.
In this chart, two tops of the double top pattern are making almost similar high but look at the indicator window below, which is making lower high. It’s called divergence, which means the trend can reverse. The indicator used here is RSI (14).
Double top pattern with bearish candlestick patterns:
Almost all the double top patterns will show a bearish candlestick pattern. May times, you will see long wicks in the upper sides of the candles, which means the price of this asset is rejecting to go upside.
In this picture, look at the orange circle marked. This is the area where you should look for bearish candlestick patterns. Bearish candlestick pattern always leads to bearish movements, so finding bearish candlestick patterns here will give you an extra confluence.
The double top pattern in action
This is a chart of Robi Axiata Ltd where a perfect double top pattern is shown. Here two tops of the patterns are rejected from an almost similar price point. Divergence is also present here because the price is making a similar high, but the indicator (rsi) is making a lower high, indicating the trend is weakening and the price can fall. After the formation of the two tops, the price crossed the neckline towards the downside. Then price retest the neckline, which gave the final confirmation. These are the simple thing you should look for in a double top pattern.
A double top pattern always gives a clear indication of future prices. If you can master this pattern, it will give you an advantage in trading. If you bought a financial instrument and saw a double top pattern is forming, you should be aware of what is coming next. Whenever the double top pattern formation is completed, you should exit your trades unless you are a long-term trader. A long-term trader can hold his trades based on his strategies, but it will not be wise for short-term traders to hold trades after forming the double top patterns. If you are thinking of buying an asset and see a double-top pattern forming, you should avoid buying this asset. Mastering this pattern will give you a clear advantage in trading.