Identifying circumstances when the price will break out in a particular direction is significantly easier to identify with chart patterns. Analysts and ace traders rely on the chart patterns to either book gains or avoid hefty losses.
The double top pattern is a vital technical trading pattern to understand and incorporate into a trader's toolkit. The double top pattern, when applied correctly, can spare traders from incurring significant losses.
Let's look at the double top pattern meaning to understand the way forward when you notice the pattern.
What Is a Double Top Chart Pattern?
A double top pattern is a chart reversal pattern that appears when a price touches two relative highs with a small decline between them. The double top pattern is complete when the price line breaks through the support level.
What Does a Double Top Tell You?
The chart demonstrates that two peaks, or "tops," occurred following a strong lead-up. However, the second top was unable to break the first top's height. This indicates a reversal is imminent since the purchasing pressure is nearing its end. This double top indicates a plunge; thus, the entry trade should begin under the neckline. Double peaks frequently result in a downtrend, allowing traders to book profit before the decline.
A double-top chart pattern includes two highs separated by a low. The double top is verified when the price drops below the support line following the second peak. Additionally, in the double top pattern, the volume amplifies after the price line breaches the support level. The price range that an asset maintains for at least a brief period without falling is the support level. Thus, before entering the position, traders should always validate the reversal with chart patterns and other indications such as volume.
Trading with Double Top:
When trading using double top chart patterns, there are several ground principles.
● Establish if the trade is in an uptrend or a downtrend.
● Traders should look for two round tops and record the size of the tops.
● Traders must only take a short trade if the price has broken out of a support level.
The volume of transactions is one of the most powerful signs confirming the pattern's establishment. The double top is verified if the volume has increased after breaking the support level.
Double tops are frequently recognized as patterns that signal a trend reversal. The first and the second top, which would be at the same highs, are primarily in the shape of a ‘U’.
The Limitation of Double Tops
A true double top is an exceedingly negative technical pattern that can lead to a sharp drop in a stock or asset. However, it is crucial to be patient and find the critical support level to validate the identity of a double top. A double top might result in a false reading and early departure from a position based only on the construction of two successive peaks.
The double top formation can assist traders and investors in exiting a position even before the asset's value falls significantly. One can take action based on the double top chart pattern only in conjunction with other indicators such as volume, height, and width.
Q1. How reliable is a double top pattern?
Ans. When spotted correctly, double top formations are extremely useful. However, without patience and attention, their interpretation might be erroneous.
Q2. When should you use a double top?
Ans. Double top patterns should be used only when entering a short-term trade.
Q3. How do you trade double tops like a pro?
Ans. To interpret the double top pattern, always check the beaching position of the support level and monitor the rising volume simultaneously.