Double top chart pattern occurs when the price moves in an “M” visual and features a strong resistance level for the underlying stock or Cryptocurrency. The double top pattern is bearish and alerts the traders to book their profits or open a short position. It usually forms when the price reaches new highs exhausting the bulls.
The double top chart pattern is a less common occurrence than the double bottom pattern. Although both are a reversal pattern, the double top formation provides the trader with more beneficial information than later. It has a high success rate and is frequently used by many traders.
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Keynotes on Double Top Chart Pattern
- The double top is a bearish reversal pattern and consists of two peaks
- The double top formation is a rare occurrence on forex or Crypto charts
- It is the opposite of double bottom pattern
- The previous trend should be an uptrend for the double top breakout to exists
The Double Top Chart Pattern Formation
Prior trend and first peak: As with every reversal pattern there must be a prior trend. With a double top chart pattern, the previous trend should be an uptrend. The price makes higher highs and tests heavy buying pressure. There is a war between bulls and bears and occurrence of Doji candle at the top of the double top pattern is a norm.
New support: Price begins to fall as sellers take their profits and buyers drop their bid price and awaits a better entry position. There is a low volume at this stage and mid-term support comes into formation. The neckline provides the next area for price to rise.
Breaking the support: The price starts to rise again from the support area and traders hop in. Continuous uptrend pushes the price of stock or Cryptocurrency to the previous highs but this time it fails to break the resistance level. The double top of the pattern comes into effect and bears take over the market pushing the price to the support area and eventually breaking it.
The Double Top Pattern in Action
The double top chart pattern is a rare occurrence as the evening star usually forms at the peak of the uptrend to signal a bearish reversal. However, there are some extreme examples of a double top pattern in existence. One of my favorite double top formations was on the Bitcoin chart when the price tested $12000 back in early 2018 but failed to break it.
Double top chart pattern formations are highly effective if spot right. However, they can be extremely damaging if interpreted incorrectly. There are various circumstances when traders have short positions because of a fake breakout. Remember, a real double top usually forms after an uptrend and can lead to a sharp decline in the prices of stock or Cryptocurrencies. A double top pattern is only confirmed when the price breaks the support and retest the neckline as the new resistance.