Hello Dear Financial Market Followers,
As you know, encountering ups and downs in financial markets is a common occurrence. Every day, while observing price fluctuations in financial markets, we have to decipher this complexity. To keep the pulse of the markets and read the right signals, we need tools like technical analysis. Among these tools, the Double Top pattern is particularly notable and known for its reliability. In this article, we will take a closer look at the Double Top pattern, examining its formation process, technical details, and trading strategies step by step. We will seek answers to questions such as at which levels to sell, where the stop loss point should be, and how to determine the target price. We will also discuss the tricks to successfully trade using this pattern.
What is the Double Top Pattern?
The Double Top pattern is a reversal pattern indicating the
end of a bullish trend. As the name suggests, this pattern represents a
structure where two consecutive tops form on a price chart. The underlying
logic of the Double Top pattern is a deep reflection of market psychology. The
inability of prices to surpass a certain level twice indicates a weakening of
buyers. The first top is the market's attempt to reach a high point. The
subsequent correction is a result of uncertainties in the market. The second top
can be seen as the buyers' last attempt to test the same level once more.
However, this effort usually ends in failure, and prices break through the
critical support level called the neckline, entering a downtrend. Therefore,
the Double Top pattern is classified under reversal patterns among chart
formations. It is observed at the end of a bullish trend, signaling that prices
will change direction and transition into a bearish trend.
The following visual provides an example that will allow you
to examine the Double Top pattern in detail. You can carefully study the visual
to better understand the structure of the pattern:
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| The Double Top Pattern. |
Note: There is also the Double Bottom pattern, alongside the
Double Top pattern used to predict trend reversals, in technical analysis. The
Double Top and Double Bottom patterns are opposite chart formations. While the
Double Top pattern indicates the end of an uptrend and the beginning of a
downtrend, the Double Bottom pattern signals the end of a downtrend and the
start of an uptrend. These two patterns provide market signals that move in
opposite directions.
How does the Double Top Pattern Form?
The Double Top pattern usually occurs at the end of an
uptrend. The graphical appearance of this pattern consists of two consecutive
peaks (tops), a trough between them, and an imaginary neckline. The Double Top
pattern is defined by prices reaching the same high level twice without
surpassing it, and then moving into a decline. Typically, both peaks are seen
at the same height, but sometimes they can occur at different heights. The
Double Top pattern consists of the following stages:
First Top: During the continuation of an uptrend, prices
rise to a certain level. When this level is reached, prices usually begin to
pull back due to the influence of a resistance level. After the first peak,
prices usually drop to a strong support level. This support level is often one
of the previous low points. This first peak forms the initial top of the
pattern.
Second Top: After prices pull back to the support level,
they begin to rise again. However, this time, prices approach the first peak
level again but usually do not surpass it. The second top is the point where
the first peak level is retested. Experienced traders might sell at this level,
anticipating that prices will decline again. This situation leads to the
formation of the second top. During the formation of the second top,
trading volume is usually lower compared to the first peak. This can indicate that
buyers’ confidence in the peak level has decreased and that sellers are gaining
control of the market.
Neckline: After both peaks, prices decline and usually
retrace to the previous low level. The line where this retracement halts is
commonly referred to as the neckline of the pattern. The neckline is a
horizontal or slightly sloped line that connects the low points between the two
tops. This imaginary line is often also known as the support level.
These steps illustrate
how a Double Top pattern forms. The Double Top pattern is often forecasted as a
signal of a trend reversal. The first top indicates the weakening of the
uptrend, while the second top shows that this weakening is continuing.
How to Trade the Double Top Pattern?
In price charts, forecasting the end of a trend and the
beginning of a new one is a critical skill for any trader on the path to
success. At this point, chart patterns provide us with the ability to predict
these reversals. Thanks to chart patterns, we can anticipate reversals in price
movements and trade accordingly. The Double Top pattern, in particular, is one
of the simplest yet most effective reversal patterns, indicating that a bullish
trend is nearing its end and a bearish trend may be starting. This pattern,
which involves two consecutive peak points, indicates that buyers in the market
have lost their strength and sellers have gained strength. The failure of
prices to surpass the second top and the subsequent retracement clearly shows
the weakness of the buyers.
The Double Top pattern is complete when prices break the
neckline downwards. This breakdown is generally considered a sell signal and
indicates that a strong downtrend may be starting. Sometimes a strong breakdown
occurs, and prices continue to fall without a retest. In this case, it might
make sense to open a sell position when prices break below the neckline.
However, sometimes after the breakdown, prices may drop a bit and then pull
back. In this scenario, it may be more logical to sell when prices start to
decline again. However, confirmation is important for validation. Therefore, it
is necessary to wait for a candle close below the neckline and to verify with
technical indicators such as volume, trend, and momentum.
- Sell: A sell order can be placed when prices break below the neckline or after a retest followed by a decline.
- Stop Loss: It is common practice to place the stop loss order just above the neckline or slightly above the second top level.
- Target: The target price is usually the height between the neckline and the tops projected downward, in a Double Top pattern. This height is measured from the neckline to set the target price.
Examining the 1-hour chart of the NZD/USD currency pair
below, we can see that the Double Top pattern formed at the end of an uptrend,
leading to a trend reversal. After the neckline was broken downward, prices
fell but then pulled back to test the line. The price pullback did not exceed
the second top. In this case, placing the stop loss above the second top level
was an excellent choice. In shorter timeframes, placing the stop loss order at
the top would be more appropriate:
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| Uptrend reversal in NZD/USD via Double Top. |
Now let’s look at another example. In the 4-hour chart of
the USD/CAD currency pair below, we can see that the Double Top pattern
initiated a strong downtrend. The Double Top pattern normally forms at the end
of an uptrend and signals a trend reversal. As seen in the chart, when the
support level known as the neckline was broken downward, this breakdown
confirmed the start of the downtrend. After breaking this level, prices fell,
then pulled back, and continued to decline steadily and consistently. This decline
indicates an increase in selling pressure. This clear example in the chart
demonstrates how the Double Top pattern works and the signals it provides to
traders:
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| Double Top Pattern on USD/CAD 4H Chart. |
Remember: The information provided here is not investment advice. When trading based on chart patterns in the Forex market, false breakouts caused by sudden price fluctuations can occur. This can be seen with all technical tools, including the Double Top pattern. Therefore, risk management should always be a priority, and you should use it in conjunction with other technical indicators.