What is Double Top chart Pattern?
Double Top is a chart pattern, formed by price action, with two swing tops placed side by side, almost at the same level. It is very profitable reversal chart patterns. It is very reliable with 60-70% probability. This is created in an uptrend when the price hits a resistance level twice and reverses to continue in a downtrend.
They are the pressure areas in a stock chart, which may be a major resistance area, or it may even be a major target area. Here most traders having long position book profit. And selling for short trade begins. The trend changes from uptrend to downtrend. The resistance trend line of this pattern is an almost horizontal line connecting the two swing tops of the pattern.
It is so named because the pattern is in the form of English alphabet 'M', with one swing bottom and two swing tops. Hence the name Double Top Chart Pattern.
Trend is your friend. Dance with the friend. Tune to the trend.
There are two great forces which move the price up and down. They are demand and supply. Double Top is the result of increase in supply over demand for the stock.
These are pressure areas in an uptrend. These are major target areas or major resistance areas where most traders wish to sell the stock. Here uptrend changes to downtrend.
In an uptrend the price keep making higher high swing highs and higher high swing lows. As the target area or the resistance area is approached there is increased selling. As the supply increases the price falls down forming a swing high. This swing high forms the first swing top of double top chart pattern formation.
Because of increase in supply over demand for the stock, the price falls. When selling is exhausted, buying continues as usual because it is a bargain price to buy in view of previous price rise. So there is an increase in the demand for the stock and the price rises. This price rise creates the swing bottom of this pattern.
Although many traders are buying and the price is rising, it is not backed by smart money. Major funds are not buying. Instead they are interested in selling at this level. This time the price does not rise much above the previous swing high. It does not make a higher swing high. Rather it just rises to the level of previous swing high which is the major resistance level.
Here the supply again increases and the price swings down forming the second swing top of this double top chart pattern. A trend line connecting the highest points of these swing tops and extended to right forms the resistance line for this pattern.
Between these two swing tops there is a swing bottom. A horizontal trend line drawn at the lowest point of this swing bottom forms the support line for this pattern.
Study the chart given below.
This chart shows a Double Top Chart Pattern which is the bearish reversal pattern in an uptrend.
Pattern trading is one of the strategies of making money in stock trading. Among the chart patterns double top chart pattern formation gives us the opportunity to cover our long position and enter a short trade. These trades will have high rate of success.
What is invisibly going on in the market is very well expressed on the visible chart. The first top is higher high swing high with higher high swing lows. This is in tune with an uptrend. But unusual increase in volume at this level should rise suspicion of heavy unloading of stock. It is easy to distribute great quantity of stock in a bullish trend.
The failure of second swing top to form higher high swing high at the level of the previous resistance, tells us that the price rise has arrested. If the resistance is strong enough to stop the further rise of the price, it is an indication that bears are active behind the screen. If the price faces resistance, it should alert the formation of two tops.
Next when all the buyers are exhausted, the price falls and breakout below the support trend line of this pattern. Here the price drops below the previous swing low and makes first lower low. Now a downtrend begins. By definition downtrend is marked by lower low swing lows and lower low swing highs.
The moment you see a stock making a double tops chart pattern cover all your long position and get ready to go short below the support line drawn below the low of the central swing low. A close below the support trend line is a sell signal to go short. Protect this short trade by placing a stop loss buy order above the resistance trend line of the double top pattern.
This chart shows a Double Top Chart Pattern which is the bearish reversal pattern in an uptrend. After breaking below the swing bottom, the price retraces back to test the support turned resistance trend line.
Once the price breaks down below the support line, many a time it pulls back to test the support turned resistance line. Those stocks which does not pullback after a breakout perform better than those which do pull back. Stocks which breakdown with heavy volume do better than those which breakdown with low volume.
If the price pulls back and falls, move the stop loss buy order to just above the swing high formed when the price falls after pull back.
The minimum target for this short trade is equal to the range of the pattern. That is the height from the support line of the pattern to the resistance line of the pattern, applied below the support line from the break down point. Though this is the minimum target, many times the reward will be many times this which increases the risk to reward ratio.
The two swing tops need not be exactly at the same level. A difference of up to three percent, is considered as acceptable.
There are many more chart pattern formation used in pattern trading. Some of them are listed below. You may click on the name of each chart pattern listed below to learn and understand more about them.
Continuation Chart Patterns