Meaning of Double Top Pattern

Many believe that to increase wealth via the equity markets, you must stay invested for a long period of time. Although investing long-term can have its advantages, it is not the only way to make a profit. It is possible to make a profit trading if you have the right knowledge, are able to research well and can use risk management strategies. You need to be able to identify patterns and understand the meaning of them to trade well. The majority of patterns are limited to the candlestick charts. However, you can find the double top pattern in line charts and bar charts.

Formation

If you don't know what action to take, a pattern is useless. There are two types of patterns: continuation patterns and reversal. A strong bearish reversal pattern is the double top chart. This pattern signals the end to a long rally. A double top chart is, as the name implies, two highs and a low. Once the price drops below the support level, the double top pattern will be confirmed. The lowest price touched between the tops is called the support level.

Meaning double top pattern

On technical charts, it is easy to see the formation of the double-top pattern. Double top formation is one the most misunderstood patterns. After the formation of the second layer, the double top pattern must be confirmed. We will now look at the double top to understand how it is formed.

The formation of tops is a clear sign that bulls are in control of markets. The bulls push the market higher, forming the first top. This is followed by a normal correction. The correction causes the lowest price to fall between the tops. The bulls then take control of the market and drive the price higher. This is the formation of the second top. After the formation of the second high, the pattern becomes more interesting. The important thing to notice in the double top chart is the fact that the highest point of the second top is almost the same as the first top. This signals the decline of bulls.

How do you trade?

For the double top pattern, the formation of the second top can be considered an inflexion point. Two options are possible after the formation the second top. The double top pattern will not form if the bulls can regain control and don't let the price drop below the support level. The double top pattern will be confirmed if the bears control the market and the price falls below support level. This is the lowest level reached between the two tops. This is an indicator of extreme reversal, and one should consider selling security.

It is important to consider a few things before you take action based upon double top formation.

A wider trend: This double top formation is a bullish reversal tendency. This is only effective if it forms after a longer bullish trend. A bullish trend that precedes a double-top formation should be long, i.e. A minimum of three months. Avoid a double top pattern following a brief rally.

Height A double-topped formation should have a distinct height or depth. A double top pattern should have a distinct height and depth. However, there is no standard for determining the height or depth. Double top patterns that have deeper lows are more likely to indicate reversal. However, deeper patterns can take longer to form.

Width The tops are only identifiable if there is a sufficient time between their formation and now, also called the width. The difference between the tops can be large or small, but it should not exceed one month.

Volume: This is the strongest signal that indicates the formation of a pattern. The volume of the second top generally is lower than that of the first. The volume of the second top may be lower than the first top. If it is greater or equal to the first, the reversal might not last and the rally could continue.

Conclusion

Investors and traders can exit a position using the double top pattern before the asset's value begins to decline. The double top chart pattern can only be used in conjunction with other indicators such as volume, height, and width.