Common chart patterns--Double top

Double top patterns are most commonly seen chart patterns in bar, line and candlestick charts. As the name suggest double tops will have two peaks at almost same price levels. 

Features:

• Bearish reversal signals:

Double tops are indication that the uptrend is going to change its direction.

• Formed during an uptrend:

 Double tops can be seen in an uptrend.

• Easy recognition:

Double tops also called as ‘M’ patterns can be easily identified by the M shape formed by the pattern.

Formation:

Double tops are formed when in following steps:

1. A new high is formed in an uptrend.
2. Due to resistance price falls from the new high and finds a support. This creates a trough.
3. From the support price again bounces up to the level of previous high.
4. Due to reduction in volume and resistance price couldn't move up and falls freely breaking the support.

                    Thus a double top is formed.

See the above picture the left side of chart indicate that the price was in an up- trend. It created a new high (top 1) then a trough and again a high (top 2). Then the price fell breaking the support ( lower red line indicate support). Thus price direction changed.

Be careful about these:

Even though double top is most common chart pattern, many a times traders fail to use the pattern profitably. So while trading a double top consider these points carefully.

• Confirmation, confirmation, confirmation:

Enter a double top only after confirmation. A double top can be confirmed when the price breaks the support of trough or neckline.

 See the above picture the price succeeded in breaking the support line. Enter a trade only after you see this.

See the above chart. Top 1 indicate the first peak formed and top 2 the second peak after a trough. If you had entered the trade without waiting for confirmation at the level of top 2, your stop loss would have hit as price didn't move down and cross the support line. So always wait for the confirmation.

Volume:

Volume also play an important role in trading with double tops. In a double top formation, usually volume gets diminished during the formation of second top. As the price goes down and breaks the support line, volume increases. So take in to consideration volume while you trade with double tops.

Retest of breakout:

In certain cases after the breakout of support level, price will again rise to retest the level. This is a good confirmation signal that the pattern is strong.