Double top patterns are bearish patterns. It consists of two peaks or resistance levels. After the first peak level is formed, the price pulls back quickly or gradually. After that, the price moves back up to the first level, but it can’t break that first peak level and fails, thus creating the double top rejection. Look for neckline failure to confirm bearish continuation.
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A double top pattern consists of several candlesticks that form two peaks or resistance levels that are either equal or near equal height. Typically, when the second peak forms, it can’t break above the first peak and causes a double top failure. They are formed by twin highs that can’t break above to form new highs. The double top pattern is typically known as a bearish reversal pattern. It goes up, back down, back up, and down again to form what looks like a letter M.
Double top patterns are indicators of a long-term trend reversal. The bulls try to push the price twice before giving in to the bears. Double tops are popular patterns found on all time frames of charts.
Those two peaks form a key resistance level, whereas the middle trough can be supported. Support and resistance levels are some of the most important aspects of trading. Traders are aware of these key levels and how to trade them.
The real bodies and wicks of candlesticks form these key support and resistance levels and tell a story. The resistance level of double tops needs to hold for the trend to be confirmed. Pairing double top patterns with other technical analysis can go a long way for finding the best entries and exits.
The first peak of a double top marks the highest point of the current trend. Because this is a reversal pattern, there must be a trend to reverse.
Basics
The picture above is an example of a double top pattern. Notice how a blue bullish candlestick moved up to create the second peak, followed by a bearish candlestick that created a lower high. Traders enter a short position once the price falls below the base of the double top and use a candle close above the second peak as a stop level.
They tend to form during an uptrend. It’s not always that way, though. Sometimes, you can find double tops when the price is in a downtrend trying to reverse up.
The first high of the double top should be normal and insignificant enough to raise a red flag. The uptrend shouldn’t be in jeopardy yet. That comes later.
The trough is formed after the first high declines. If you look at the chart above, you can see the trough rides the moving average lines.
When the price gets overextended from the moving averages, it naturally wants to return to it. Hence, the high comes back down to form the trough. It may not always be that way, but it seems to follow that each time.
Volume can decline from the first high to the trough, which usually means nothing. If the lows are drawn out more round than flat, that can indicate that demand is weak now.
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Second Peak
The second high is formed when buyers return and try to increase prices. It’s the top of the first high to form a key resistance line.
Typically, you want the two highs to be similar in price. It’s important to remember that that is only sometimes the case. The double top forms as long as the second peak is close to the first.
The pattern still needs to be confirmed, though. If not, it could turn into another pattern.
Double Top Pattern Trading Strategy
- Watch for rise of 1st peak
- Next, watch for the price to pullback either quickly or slowly
- Then, watch for price action to rise again to the previous peak area
- Watch if the price can break above the previous peak resistance level
- Traders take a short once the price breaks the neckline of the top two peaks
- Place stop at the top of the 2nd peak
- Some traders take a short position once 2nd peak rejects at 1st peak
- Place stop at the top of 2nd peak
Double Top Pattern Example
Check out the double top signal on $XLF. Notice how the second peak couldn’t break the first high. Both peaks created a rising wedge pattern that failed. After the first peak, there was a large falling wedge pattern. You’ll notice that the double top looks like a cup and handle pattern, but the handle area failed at the second peak level.
$BABA Example
This is an example of a double top formation on a daily chart of $BABA. Note how the second peak level couldn’t break above the first level. This high wave candle created indecision and warned of weakness after the failure; a nice-looking bear flag.
Decline in Price
When trading double top patterns, you need a decline in price from the second peak. This is what gives it the M shape. Volume is coming in even though the price is falling.
As the price nears support, which is the trough, it must break and fall below that for the double top reversal to complete. It would be best if you had volume for this as well.
The support level now becomes resistance. Watch for a test of this new level by traders to ensure it holds. As always, volume drives the price to test these levels.
Double top patterns may seem pretty straightforward but can be deceptive. The peaks should be separated by at least a month on the daily chart; otherwise, it could be normal resistance rather than a change in trend.
Confirmation of pattern completion is always smart, so you’re not guessing. Study these patterns and practice trading them so you learn the ins and outs of how other traders trade them.
Final Thoughts: Double Top Patterns
When trading double top patterns, you need a decline in price from the second peak. This is what gives it the M shape. Volume is coming in even though the price is falling.
As the price nears support, which is the trough, it must break and fall below that for the double top reversal to complete. It would be best if you had volume for this as well.
The support level now becomes resistance. Watch for a test of this new level by traders to ensure it holds. As always, volume drives the price to test these levels.
Double top patterns seem pretty straightforward but can be deceptive. The peaks should be separated by at least a month on the daily chart; otherwise, it could be normal resistance rather than a change in trend.
Confirmation of pattern completion is always smart, so you’re not guessing. Study these patterns and practice trading them so you learn the ins and outs of how other traders trade them.
Frequently Asked Questions
Is the double top pattern bullish? No, the double top pattern is a bearish reversal pattern. It signals a trend reversal because the second peak level cannot break above previous resistance.
The double top pattern is psychologically a bearish setup because previous resistance levels can't be broken. The second peak level is lower or equal to the first.
A double top pattern is calculated when the high of the second peak is lower than the high of the first peak. This shows that the previous resistance level can't be broken.
