What is the significance of a double-top pattern?

Patterns on a chart are recognizable shapes created by the values of securities at different points in time. A pattern is represented by a line connecting many price points throughout time, such as opening prices, highs and lows.

These prices could potentially include closing charges. Chartists employ data trends to make educated guesses about where prices will go in the future. Patterns, the foundation of technical analysis, serve as its foundation.

There are various trading patterns that indicate whether the market is bullish or bearish.

What exactly are double-top patterns?

A double top is a bearish reversal pattern. It is composed of two peaks on a level of support known as the neckline. The first high will finally retrace to the neckline following a strong bullish trend.

Once it reaches this level, the momentum will revert to positive in order to construct the second high.

For the double-top pattern to be confirmed, the trend must retrace more than it did during the initial pullback after the first peak.

This typically indicates that the price momentum has breached the neckline level of support and that the bearish trend will continue for the foreseeable future.

Traders that employ the double-top pattern will frequently attempt to build a short position at the second peak in anticipation of the bearish reversal that the pattern occasionally suggests.

Double-top pattern formation

A pattern will not help you if you don't know what action to take. There are two kinds of patterns: continuation patterns and reversal patterns.

The double-top chart pattern denotes a significant bearish reversal. It implies the conclusion of a long rally. A double-top chart, as the name suggests, has two highs separated by a low.

The double top pattern is confirmed when the price falls below the support level after the second top. The lowest point attained between the two peaks is the support level.

What is the best way to trade double-top patterns?

The end of the double top pattern is marked by the formation of the second top. Following the construction of the second top, there are two options.

If the bulls recover control and do not allow the price to go below the support level, the double-top pattern does not form.

If the bears win and the price falls below the support level attained at the low between the two tops, the double top pattern is confirmed. It is an extreme reversal signal, and the security should ideally be shorted.

While acting on the basis of the double top formation, it is necessary to consider a few factors.

Broader trend: A bearish trend reversal is indicated by the double-top pattern. It is only advantageous if it is built following a wider bullish trend. The bullish trend that precedes a double-top formation should last at least three months.

It is best to prevent a double-top pattern after a quick climb.

Height and depth of a double-top construction should be distinct. While there are no well-defined standards for a double-top design's height or depth, a 10% difference is desirable.

Double-top patterns with deeper lows are seen to be a more powerful reversal indicator. Deeper patterns, on the other hand, may take longer to emerge.

Width: The tops can only be detected if the time gap between their development is sufficiently large. While the difference between the two peaks could span months or years, it should endure at least one month.

Volume: One of the most important indicators that confirms the pattern's establishment is trade volume. The volume of the second top is frequently less than the volume of the first.

If the volume of the second peak is more than or equal to the volume of the first, the reversal may not hold and the rally may resume.

The significance of employing a double-top pattern

There are several advantages to using the double bottom and double top patterns in the financial market.

First, as previously said, they are pretty easy to identify. Only a visual assessment and the use of trendline tools provided by your trading platform are required.

Second, it is simple to incorporate extra trading tools while using the double top and double bottom. As you can see, we used the Fibonacci retracement technique fast.

Furthermore, technical indicators like the Relative Strength Index (RSI), momentum, and the Relative Vigour Index are easy to use (RVI).

Third, while the double top and bottom are not always correct, they typically result in positive results. This is because the idea has become engrained in the minds of other financial traders.

Conclusion

Traders and investors might benefit from leaving a position using the double top pattern if they do so before the asset's value drops significantly.

The double-top chart pattern may only be used in conjunction with other chart patterns and indicators, such as volume, height, and width, to guide trading decisions.