Double Top


The Double Top is a bearish reversal chart pattern characterized by two consecutive peaks that are roughly equal in height, separated by a trough. This pattern mirrors the shape of the letter "M". The first peak forms during an uptrend, indicating a resistance level that the price fails to break through significantly. After a pullback to the support level (the trough), the price attempts to rally a second time but fails to exceed the previous peak, leading to a decisive reversal of the trend. The Double Top signals a change from bullish to bearish momentum, suggesting that the asset's price is likely to decline.

Input Parameters:

  • Retracement: Apply Fibonacci retracements.
  • Time Span - Defines lookback period.
  • Type - Confirmed, in force, or all.
  • Bands - Apply ATR, St.Dev, Constant, or Percentage bands.

Use Cases:

  • Identifying the Pattern: Look for a significant uptrend followed by two highs at approximately the same price level. The pattern is confirmed when the price breaks below the support level—the trough between the two tops.
  • Entry Point: A common entry point for a short position is after the price breaks below the support level, confirming the reversal. Some traders wait for a pullback to the support-turned-resistance level to enter, ensuring the breakout's validity.
  • Stop-Loss Placement: A stop-loss can be placed just above the second top or the highest point of the pattern to protect against false breakouts and a return to the uptrend.
  • Profit Targets: The target can be estimated by measuring the height of the formation (from the support level to the highest top) and projecting this distance downwards from the breakout point.

The Double Top pattern is a valuable indicator of potential trend reversals in uptrends, offering traders clear signals for entry, stop-loss placement, and profit targeting. However, confirmation of the pattern through a breakout below the support level is essential to minimize the risk of false signals.

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Double Top.PNG

May 11, 2024

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