What is the Double Top?

What is the Double Top?

A double top is an extremely bearish technical reversal pattern that forms after an asset reaches a high price two consecutive times with a moderate decline between the two highs. It is confirmed once the asset’s price falls below a support level equal to the low between the two prior highs.

A double top is a bearish technical reversal pattern.

It is not as easy to spot as one would think because there needs to be a confirmation with a break below support.

The Double Top Confirmation

The double top is a common occurrence towards the end of a bullish market. The price formation looks like two peaks that occur after one another. The peaks are generally the same price on a price-vs-time chart. The peaks include a separation or parting, which is the minimum price.

The parting or separation is also known as a valley. The price level at the valley is known as a neckline of the price formation. In the instance where the price drops below the neckline, the price formation is considered to be confirmed and complete. It serves as an indicator that the price is likely to continue to fall or that a continued price drop is looming.

The double top pattern tells an investor, trader, or analyst that the buyers in the market are prevailing, and as such, the demand is overtaking the supply up until the formation of the first top. It causes prices to rise. The trend is then reversed, and the sellers in the market begin to prevail, subsequently with the supply overtaking the demand.

See also :  What is an Inflation Swap?

As the supply surpasses demand, the prices begin to fall. It creates the neckline or the price valley. Following the valley, the bulls or buyers in the market begin to dominate again, and prices begin to rise.

When the traders notice that the prices are not rising beyond the level reached by the first top, the bears or sellers may then begin to dominate, and it begins to lower price levels. It causes the formation of a double top. Should the prices drop beyond the valley, it is generally a bearish signal.

Two factors that allow for analysts or traders to determine the existence of the double top pattern are volume and the time between the peaks. When looking at the volume, it is beneficial to note that the buildup of the price level reached on the first peak can be attributed to increased volume. The fall to the neckline occurring thereafter can be attributed to low volumes. The second attempt leading towards the second peak should also be on low volume levels.

Limitations of Double Tops

Double top formations are highly effective when identified correctly. However, they can be extremely detrimental when they are interpreted incorrectly.

 Therefore, one must be extremely careful and patient before jumping to conclusions.

Drawbacks of the Double Top

As with all other chart patterns, the double top pattern is not to be used on its own.

Although the formation may provide an overview of what is happening between the bulls and the bears, analysts and traders need to be precautious when identifying the price formation and ensuring its legitimacy before making a trade.

Leave a Comment