Double Top Chart Pattern
The Double Top chart pattern is a bearish reversal chart pattern. It signifies that the uptrend is over and a new downtrend has begun or is just about ready to begin, depending upon which version of the Double Top chart pattern is developing. There are 2 slightly different versions of the Double Top chart pattern.
Double Top chart patterns are rather easy patterns to identify on a chart. Think of two mountain peaks on the horizon with a valley in between them. Both peaks approximate the same height. That is the basic description of a Double Top chart pattern.
A Double Top chart pattern can be a ferocious reversal signal, leading to quick price declines after the failure to breakout from the previous high.
Requirements
There are 2 slightly different versions of a Double Top chart pattern. In the first illustration, Peak #1 represents the high point of the pattern. In the second illustration, Peak #2 breaks above the high point from Peak #1, but usually not by much and not for long.
Characteristics & Observations
Following are some of the characteristics for Double Top chart patterns that I have observed. These characteristics apply to both types of Double Top chart patterns, unless specifically stated otherwise.
Breakout Area
Trading Strategies
Let’s look at this from an Elliott Wave perspective. If the 1st peak is slightly higher than the 2nd peak, proceed with caution as the 1st peak may represent the top of Wave 5 in a Bullish Impulse wave pattern. If so, the 2nd peak may represent the top of a Wave B. Or it could represent something even more bearish, Wave 2 in a Bearish Impulse wave pattern.
If You Are Currently Long in the Stock
Double Top chart patterns identify a time to take profits. This is especially true when the 2nd peak does not push as high as the 1st peak in the pattern. When a bearish reversal candlestick pattern develops at the top of the 2nd peak, that would usually confirm the trend reversal, especially if the bearish candlestick develops on selling volume that is above the average trading volume.
Double Top chart patterns are typically a major sell signal when you are long. Other indicators may have provided clues that the uptrend was coming to an end, so you may have started the scale-out process already. If you haven’t, it would be wise to scale-out of some shares after the failure to push above the high from the 1st peak. Start locking in profits.
If You Are Looking to Short the Stock
A short-sale strategy, while risky, can also be lucrative in a short period of time. If you have been investing long enough, then I am sure you have hear the expression that stocks take the escalator up and the elevator down. Because stocks tend to move quicker to the downside, shorting a stock can provide a hefty return in a short period of time. Remember though, with a potential hefty return comes added risk.
Real Chart Examples
