What is Double Top Pattern?

Double Top Pattern is a very important technical analysis for stock market traders. This pattern is very useful for predicting the trends and reversals in the marketplace. The chart for a double-top pattern is an indication of a bearish signal, whereby an asset attains a high twice, registering a small dip between the highs. It is confirmed by the fact that when the asset price is less than the support level, it is the low point between the two highs. In this article, we will find out what's double top pattern looks like, how to spot it properly, and then compare its pros and cons. By doing research in these subjects, you will deeply know how you can use it in your trading strategy to make better decisions. 

How to Identify the Double Top Stock Pattern?

To identify the double-top stock pattern, follow the below-given steps: 

• Check the Trend: First, ensure that the price is trending upward before it forms the double top. It means the price has been reaching higher highs and higher lows. 
• First Peak: Let the price climb up to its highest point before starting to decline. This is the first peak. 
• Temporary Drop: After the first peak, the price will temporarily drop to form a dip or trough. 
• Second Peak: It will rise once again to reach a new height, but this second peak must be lower than the first peak and will soon start falling. 
• Pattern Confirmation: To confirm the pattern, the price should make a move below the trough formed after the first peak. This will ensure that price action was not able to breach the previous high. 
• Drawing the Neckline: After that, join the low points of both troughs with the help of a horizontal line, also known as the neckline. It acts as support. 

For proper identification of the double top pattern, prices should penetrate below this neckline upon the formation of the second peak. By doing so, one confirms that the pattern is complete and the price could decline. 

Points to Remember While Identifying a Double Top Chart Pattern

The following are the key points investors need to remember while identifying a double top chart pattern.  

• The price needs to be in a clear uptrend before the double top candle pattern forms, as this indicates a series of higher highs and higher lows. 
• After the first peak, the price should decline temporarily, as this will form a visible trough that may reflect short-term profit booking. 
• The price then rallies again to form the second top, but this peak usually fails to surpass the first top, showing weakening buying strength. 
• A valid double top is usually confirmed when the price falls below the trough formed after the first top, this indicates a failure to break resistance. 
• The neckline is drawn by connecting the lows of the two troughs and represents a key support level for the pattern. 
• A decisive breakdown below the neckline, preferably with higher volume, confirms the double top pattern and signals a potential sell or trend reversal. 

How to Trade Using the Double Top Pattern?

An identified double-top pattern is confirmed once the stock price breaks down below the trough between the two peaks—a trough likely to cause the value of the stock to come down. The trend at this point reverses, and traders can use several techniques and tactics to that effect. 

• Setting a stop-loss order just above the second peak helps protect against ascertained directional movements while preventing probable losses from the system. 
• Many traders sell short in anticipation of the potential drop in the price of the stock. 
• To ensure the proper management of the trade, the traders watch the market closely and modify their strategies based on the evolving characteristics of the double top pattern and are responsive to changing circumstances in the market. 

Advantages and Disadvantages of a Double Top

The table below shows the advantages and disadvantages of a double top stock pattern.  

Difference Between a Double Top Pattern and a Double Bottom Pattern 

The table below shows the difference between a double top pattern and a double bottom pattern. 

Conclusion

The double top pattern is a widely used technical indicator that helps traders identify potential trend reversals and manage risk more effectively. To spot such patterns in real time and act decisively, using a reliable share market app can help traders track price movements, analyse charts, and execute trades efficiently.