Describe double top

Double top: is it bullish?

An asset reaches a high price twice in a row with a slight decline between the two highs, forming a double top, a very bearish technical reversal pattern.

It is verified when the asset's price drops below a support level equivalent to the low point between the two prior highs.

How to recognize the double-top pattern?

Prior to turning to the downside, the price made two attempts to break past a resistance level at the two highs. Additionally, there is something known as a "neckline," which is regarded as the base of the pattern.

An illustration of a double-top pattern can be seen in the chart below:

Neckline: First high Second high

What has happened is that the sellers entered the market just as the buyers were trying to drive the price past a resistance level of 1.

The sellers once again entered the market in force and outnumbered the buyers, preventing the buyers from making a second attempt to reach fresh highs, illustrated at 2.

The price then turned to the downside as more sellers entered the market once it became clear that the buyers were unable to drive the price past the resistance level.

Be aware that a double-top pattern is only valid if the price breaks the pattern's neckline.

Following the discovery of this pattern on the price charts, you start searching for probable selling opportunities.

Why do double tops occur? 

Near the conclusion of a bull market, the double top frequently occurs. Two successive peaks appear to constitute the price formation.

The peaks on a price-versus-time chart frequently have the same price. The lowest price is separation or parting, which is included in the peaks.

Another name for the division or split is a valley. The neckline of the price formation is the price level in the valley. The price formation is regarded as confirmed and finished when the price crosses below the neckline. It suggests that there will be another price cut soon or that the price will drop even more.

An investor, trader, or analyst can tell if the market is dominated by buyers by looking for the double-top pattern. As a result, until the first top is created, supply is greater than demand.

It drives up prices. The trend then flips, sellers take control of the market, and supply eventually outpaces demand. Prices start to fall when supply grows greater than demand.

It establishes the price valley or neckline. After the valley, the bulls, or buyers, regain control of the market, and prices increase.

When traders notice that prices are not rising above the high level set at the beginning, the bears or sellers may seize control and start lowering prices. A double top is created as a result of it. Prices dropping past the valley are frequently seen as a bearish sign.

How do you trade in a double top?

Trading with Double Top Chart Patterns: When trading with Double Top chart patterns, there are several guidelines to abide by.

Find out first whether the market is trending upward or downward. Since an uptrend is what causes the double top to emerge, an uptrend should have been present before.

Traders should search for two round tops and record the tops' sizes.

A short trade should only be entered after the price has breached a neckline or support level.

Example: Tata Motors Ltd.'s daily chart below demonstrates how a bearish reversal happens after a double top is formed at the peak of an uptrend:

Stop Loss: If a Double Top chart pattern is present, the stop loss should be placed at the second top of the pattern.

Price Objective: The price objective needs to be equal to the separation between the neckline and the tops.

Summary

• You now know that the double-top chart pattern suggests probable selling opportunities and a potential move to the downside.

• When the neckline is broken, you can trade the pattern by setting your stop loss above the pattern and your profit target the same distance down from the neckline as the pattern's height.

• A price break through the neckline and a subsequent retest of it as resistance allow for entry. 

• The profit target is set at the same distance down from the neckline as the pattern's height, with the stop loss set above the resistance level.