The fourth component is the formation of the second high point (right peak) which is formed when prices rally again to a similar level as the first peak, forming the second peak. This is a critical point in the pattern as it indicates that the previous left peak high could not be penetrated. The 5 double top pattern components are an upward trend, left peak, trough, right peak, and a support line. A double top pattern is a bearish pattern indicating downward market prices, increasing bearish momentum, and declining bullish momentum.

The Two Peaks and a Neckline

• The double top chart formation completes when the price breaks below the neckline, leading to a potential bearish move.
• However, a double top pattern may fail like any other pattern or technical indicator.
• Strong volume on the breakdown, along with weaker volume on the second peak, offers more reliable confirmation that the double top may lead to a sustainable trend reversal.
• Increased volume on the breakdown suggests that sellers are in control, trapped long positions are being unwound, and short sellers are becoming more active.
• To learn more about a reversal pattern that occurs at a swing low, be sure to read the lesson on the double bottom pattern.

They can produce false signals or unsuccessful patterns, but they are useful for spotting possible trends and reversals. A good entry point for traders to start short positions is the break of the neckline in a double-top formation. If the price does not double top pattern rules break below the neckline, this provides a fixed level at which to enter the market and aids in determining the pattern’s invalidation.

Can the Double Top Pattern Occur in Any Market?

The double top chart formation’s first peak shows an attempt to push the prices higher, and the second peak shows a failed retest of the resistance level. The double top chart formation completes when the price breaks below the neckline, leading to a potential bearish move. The double top pattern can be one of the clearest signs that a market is about to reverse.

Take-Profit Targets

The double top chart formation assists traders when setting precise entry points for short trade positions. The neckline becomes critical for confirming the double top pattern’s validity by acting as a support level between the two peaks. A decisive break below the neckline validates the bearish reversal, providing a clear signal for traders to enter short trades. The breakout confirmation allows Forex, stock, cryptocurrency and commodity traders to set stop-loss orders above the peaks, managing risk effectively.

• A double top pattern entry point is set when the price moves below the support line of the pattern.
• Flag patterns, characterized by a strong trend followed by a consolidation phase, indicate that the prevailing trend will continue after the breakout.
• To identify the double top chart pattern, look for two prominent peaks at a similar price level, separated by a trough.
• Often found after an extended uptrend, it signals that buying pressure is fading and a potential trend reversal to the downside may occur.
• Technical chart patterns called double tops often point to the possibility of a reversal to a downtrend from an uptrend.

It indicates that buyers failed twice to push prices above a specific resistance point, suggesting diminishing buying pressure and increasing selling interest. This failure to establish new highs often precedes a significant downward movement as sellers gain control of the market. The pattern reflects a shift in market psychology from optimism to caution and eventually to pessimism.

Common Double Top Mistakes #

The Double Top chart pattern is one of the most reliable reversal patterns in technical analysis. Often found after an extended uptrend, it signals that buying pressure is fading and a potential trend reversal to the downside may occur. If you want to master how to trade double top chart pattern, understanding its structure and entry rules is essential.

To find this you simply take the distance from the double top resistance level to the neckline and extend that same distance beyond the neckline to a future, lower point in the market. The trade setup is formed when the market retests the neckline as new resistance. I hear many traders calling two tops near an important level a double top all of the time. The distance (in pips) from the broken level of the pattern to a future point in the market. That said, there is another way to estimate the potential move of a market after the formation of a double top. It doesn’t matter if it’s a double top or a head and shoulders pattern, the best and most efficient way of finding a profit target is to use simple price action levels.

A double top pattern’s most popular technical analysis indicator is the volume indicator which helps measure buying volume and selling volume as the pattern developes. The double top pattern common trading mistakes are using large amounts of trading leverage, ignoring important news announcements, and wrong stop-loss order placement. A double top pattern forms on all timeframes from intraday 1-second charts up to a yearly chart period. Double top patterns form in all global markets including stocks, bonds, futures, ETFs, commodities, cryptocurrencies, forex, and indices. The double top pattern forms on candlestick charts, bar charts, open high low close (OHLC) charts, point and figure charts, area charts, and line charts. Secondly, price drops temporarily to a support zone where there is a price bounce which forms the trough component of the pattern.

Forex Trading with FXOpen

A double top trading pattern is one of the most common formations that can be found on the price chart of any asset. Choose between the award-winning MT4 and MT5 platforms, FXOpen’s advanced multi-asset platform, TickTrader, or TradingView’s platform with numerous technical analysis tools. The formation is relatively straightforward to spot on price charts, making it accessible for traders of all experience levels. By combining these indicators, you can confirm a double top pattern, potentially reducing the risk of false signals and improving trading decisions. Confirming a double top pattern involves using various technical indicators to ensure its reliability.

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It is a bearish reversal pattern that signals a potential change in trend direction from bullish to bearish. The Double Top pattern features two peaks at the same level with a trough in between. These peaks form an ‘M’ shape and signal a bearish reversal, indicating that the asset is likely to move downward. The neckline, the lowest point between the tops, is crucial for confirming the pattern.

Mistake 2: Ignoring Volume Divergence #

The first double top pattern trading step is to identify a double top pattern by using a chart pattern market scanner to find the double top fomations in various market assets. The double top pattern drawing involves identifying two equal height resistance points and plotting the number 1 and 2 above them. Then, draw a horizontal support trend line from left to right connecting the pattern’s troughs (low points) together that marks the pattern support zone.

Noticing that momentum is declining, sellers act and increase the market’s pressure. When people start to sell out of long positions or purchase short contracts, the price reaches back toward the support level made by the previous low. Once price breaks this level, it becomes evident that the bears now have control, as seen in the continued weakness of the dollar.