A double top, a highly unfavorable technical reversal pattern, forms when an asset reaches a high price two times in a row with a modest price drop in between the two highs. In the financial markets, double peaks occur frequently. It is confirmed when the asset's price falls beneath a level of support equal to the low point between the two previous highs.
What Does A Double Top Mean?
The development of a double top could be a sign of a change in the medium- to long-term trend of an asset class. The chart shown above shows the double top pattern that developed in the stock of Amazon.com, Inc. (AMZN) during September and October of 2018 at a price of $2,050. The amount of support that grew around $1,880 in this specific situation was substantial. Although the stock plummeted about 8% from its peak in October to the support level at $1,880, the double top could not be confirmed until the stock dipped below the $1,880 mark. Following then, the share price dropped steadily until it eventually reached a level that was over 31% lower.
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In the example that follows, we will use Netflix Inc. (NFLX), and we can see what appears to be the construction of a double top in March and April of 2018. Contrarily, since the stock price rises in line with an uptrend, we can observe that support is not broken in this case and is not even tested. The stock appears to form what appears to be a double top in the months of June and July, on the other hand, if one scrolls farther down the chart. As indicated by the price falling below the $380 level of support, which finally caused a decline of 39% to $231 in December, the pattern does, however, turn out to be a reversal pattern this time. Also, pay attention to how, twice in the month of November, the support level at $380 acted as a barrier to the stock's upward trend.
Double Top Versus Unsuccessful Double Top
In actuality, there is a crucial distinction to be drawn between a double top and a failed attempt. A real double top is a highly bad technical pattern that can cause the price of a stock or asset to drop dramatically. Such a deterioration may be really devastating. But it's crucial to be patient and find the critical support level in order to establish the identity of a double top. You run the danger of getting an incorrect reading if you identify a double top only based on the appearance of two successive peaks, which can lead you to exit a trade too soon.
Double Tops Limitations
Double top and double bottom patterns, like any other chart pattern, are prone to failure. The most significant is the erroneous break out of the neckline. Price tends to break the neckline just to retrace back and continue moving in the direction of the preceding trend. Many traders enter the trade immediately after a neckline break, rather than waiting for prices to pull back and retest the neckline
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The patterns' tops and bottoms are not uniform and do not appear in predefined shapes. They vary slightly depending on market volatility, price momentum, and the time of occurrence of the pattern. Many traders may misidentify or even fail to identify.
Many traders enter the pattern at the midpoint, which is the halfway point between the neckline and the highest top point, even before the pattern has completed.
The patterns do not provide a take profit point; instead, they are calculated with other technical or risk management methods.
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