Double top patterns are a bearish pattern. It consists of two peaks or resistance levels. After the first peak level is formed, price pulls back either quickly or gradually. After that, price moves back up to the first level but it can’t break that first peak level and fails, thus creating the double top rejection. Look for neckline failure to confirm bearish continuation.
What Is a Double Top Pattern & How to Identify These Patterns?
A double top pattern consists of several candlesticks that form two peaks or resistance levels that are either equal or near equal height. Typically when the 2nd peak forms, it can’t break above the first peak and causes a double top failure. They are formed by twin highs that can’t break above to form new highs. The double top pattern is typically known as a bearish reversal pattern. It goes up, back down, back up and back down again to form what looks like a letter M.
Watch our video above to learn more about how to trade them.The market is a tug of war between the bulls (buyers) and the bears (sellers). The tug of war between these two form Japanese candlesticks patterns.
Patterns are made up of bullish candlesticks, bearish candlesticks and doji candlesticks. Each candlestick tells a story. Candlesticks then group together to form patterns.
When you add these together you get a clearer picture of what other traders are thinking and feeling. As traders, we trade on the fear and greed of each other.
Basics: Double Top Patterns
Double top patterns are indicators of a long term trend reversal. The bulls try to push price up twice before giving in to the bears. Double tops are popular patterns found on all time frames of charts.
Those two peaks form a key resistance level whereas the middle trough can be support. Support and resistance levels are some of the most important aspects of trading. Traders are totally aware of these key levels as well as how to trade them.
The real bodies and wicks of candlesticks form these key support and resistance levels as well as tell a story. The resistance level of double tops needs to hold in order for the trend to be confirmed.
Hence, knowing how to draw them is incredibly important. Read our post on how to draw support and resistance to learn more. Pairing double top patterns with indicators like vortex can go a long way for finding the best entries and exits.
Technicals of Double Top Patterns
The first peak of a double top marks the highest point of the current trend. Because this is a reversal pattern there has to be a trend to reverse (bookmark our stock watchlists page which we update daily).
They tend to form during an uptrend. It’s not always that way though. Sometimes you can find double tops when price is in a downtrend trying to reverse up.
The first high of the double top should be pretty normal and not significant enough to raise a red flag. The uptrend shouldn’t be in jeopardy yet. That comes later.
The trough is formed after the first high declines. If you look at the chart above you can see the trough rides the moving average lines.
When price gets over extended from the moving averages it naturally want to come back to it. Hence the high coming back down to form the trough. It may not be that way every time but it seems to follow that each time.
Volume can decline form the first high to the trough and that usually doesn’t mean anything. If the lows are drawn out a bit or more round instead of flat that can be a sign that demand is weak at this time (learn how to get started in stocks). Looking for more? Take our free courses to help you get started.
Double Top Patterns Second Peak
The second high is formed when buyers come back in and tries to force price back up. It’s the top of the first high to form a key resistance line.
Typically you want the 2 highs to be pretty similar in price. It’s important to remember that that isn’t always the case. As long as the second peak is pretty close to the first, the double top forms.
The pattern still needs to be confirmed though. If not it could turn into another pattern. Take our candlesticks patterns course.
How to Trade Double Top Patterns
- How to trade double top patterns:
- Watch for rise of 1st peak
- Next, watch for price to pullback either quickly or slowly
- Then, watch for price action to rise again to the previous peak area
- Watch if price can break above previous peak resistance level
- Traders take a short once price breaks the neckline of top two peaks
- Place stop at top of the 2nd peak
- Some traders take a short position once 2nd peak rejects at 1st peak
- Place stop at top of 2nd peak
The Decline to Break Support
When trading double top patterns you need a decline in price from the second peak. This is what gives it the M shape. Volume is coming in even though price is falling.
As price nears support, which is the trough, it needs to break and fall below that for the double top reversal to be complete. You need volume for this as well.
The support level now becomes resistance. Watch for a test of this new level by traders to make sure it holds. As always volume comes in to drive the price to test these levels. Volume is an important part of trading.
Double top patterns may seem pretty straightforward but can be deceptive. The peaks should be separated by at least a month on the daily chart otherwise it could just be normal resistance rather than a change in trend.
Confirmation of pattern completion is always smart so you’re not guessing. Study these patterns and practice trading them so you learn the ins and outs of how other traders trade them. Take our free stock online courses.