What is a double top?
A double top is a bearish reversal chart pattern that can form after an uptrend. It appears as two successive peaks (roughly at the same price level) separated by a trough. The pattern suggests buyers tried twice to push price above a resistance area but failed both times; when price later breaks below the trough (the “neckline”), the pattern is considered confirmed and signals a potential move lower.
Why traders care
– It signals a potential change from uptrend to downtrend.
– The neckline provides a clear level for entry/confirmation and for placing stop-loss orders.
– The vertical distance between the peaks and neckline is commonly used to estimate a downside target.
Quick real-world examples
– Amazon (AMZN), Sept–Oct 2018: two peaks near ~ $2,050, neckline near ~$1,880. After a break of the neckline the stock continued substantially lower.
– Netflix (NFLX): one apparent double top failed when support wasn’t broken; a later double top (with neckline around $380) did confirm and led to a large decline.
(Examples adapted from Investopedia — Laura Porter.)
How a double top differs from a double bottom
– Double top = two highs → bearish reversal after an uptrend.
– Double bottom = two lows → bullish reversal after a downtrend.
Both use a central trough/peak (the neckline) as the confirmation level.
Essential components of a valid double top
1. Prior uptrend — the pattern is a reversal signal, so it should follow a recognizable up move.
2. Two peaks at approximately the same price level (exact equality is not required).
3. A trough (neckline) between the peaks.
4. Confirmation: price closes decisively below the neckline (or breaks it on strong intraday action) — only then is the pattern “confirmed.”
5. Volume pattern (helpful but not required): volume often falls during the second peak and rises on the breakdown beneath the neckline.
Identifying a double top — practical checklist
1. Verify the preceding uptrend.
2. Mark Peak 1 and Peak 2. Check that the peaks are close in price (not identical).
3. Draw the neckline across the intermediate trough.
4. Look at time between peaks — could be days, weeks, or months; extreme shortness or excessive length can weaken the pattern.
5. Watch volume: declining volume on peaks, rising volume on the breakdown strengthens conviction.
6. Wait for a close below the neckline (or a confirmed break on your chosen time frame). Avoid trading purely on visual similarity without confirmation.
Trading strategies (three practical approaches)
1. Break-and-enter (conservative, simple)
– Entry: Enter short/sell after a confirmed close below the neckline.
– Stop-loss: Above the most recent swing high (the higher of the two peaks) or a fixed percentage above the entry.
– Target: Project the pattern height (distance from peak to neckline) downward from the neckline. Alternatively use nearby support levels.
– Position sizing: Size so that a full stop-loss would be an acceptable percent of account equity.
2. Breakdown + retest (higher-probability timing)
– Entry: Wait for price to break below neckline, then retest the neckline from below and show bearish confirmation (bearish candle, rejection, or indicator confirmation) before entering.
– Stop-loss: Small buffer above the retest high or the more recent swing high.
– Target: Pattern height projection or next structural support.
3. Indicator-filtered entry (reduce false signals)
– Combine the pattern with technical indicators: RSI/MACD bearish divergence (lower highs on indicator while price makes similar highs) strengthens the signal.
– Entry: After break of neckline plus indicator confirmation (e.g., MACD cross down or RSI < 50).
– Stop-loss and target: as above.
Setting profit targets and stops — practical examples
– Example calculation: Peak = $120, neckline = $100 → height = $20. After neckline break at $100, target = $100 − $20 = $80.
– Stop-loss: A typical choice is just above the most recent peak (for the short seller), or an amount that produces a desirable risk/reward (e.g., risk $5 to potentially make $20 = 4:1).
Risk management and execution tips
– Use a confirmed break (close below neckline on your trading timeframe). Intraday noise and gaps can fake a breakdown.
– Size positions so a single trade won’t jeopardize account health (common guideline: risk 1–2% of account on any one trade).
– Expect false signals — use stops and limit leverage.
– Combine with volume analysis, support/resistance confluence, and trend context.
– Backtest the pattern on the instrument and timeframe you trade to learn statistical performance for your setup.
Advantages of trading double tops
– Clear confirmation level (neckline) and natural stop placement.
– Measurable profit-target method (pattern height).
– Often easy to spot visually and to combine with indicators (e.g., bearish divergence).
Disadvantages and limitations
– False breakouts (failed double tops) are common: price may resume the uptrend after what looked like two peaks.
– Subjectivity: How similar must the peaks be? How long between them? Different traders interpret differently.
– Targets can be missed by market conditions (strong support, news events).
– Not every pattern is perfectly symmetrical; imperfect shapes complicate entries/exits.
Is a double top bullish?
No. A double top is a bearish reversal pattern. It suggests the previous bullish momentum stalled twice and sellers may take control after the neckline breaks.
Does it always mean a downtrend will follow?
No. The pattern only signals a potential reversal. Confirmation is required (break of neckline and ideally supporting indicators/volume). The market can invalidate the pattern — for example, price may fail to break the neckline or may temporarily break it and then rally.
Is trading double tops profitable? What is the success rate?
– Profitability depends on execution, risk management, the market/instrument, and the specific rules you apply (timeframe, confirmation criteria).
– There is no single universal “success rate” for double tops; empirical studies of chart patterns produce mixed results and outcomes depend heavily on sample, timeframe, and discipline.
– Practical advice: backtest the pattern on your target market and timeframe, assess win rate and average reward/risk, and adopt strict risk-management.
Common pitfalls and how to avoid them
– Trading on an unconfirmed pattern: insist on a close below the neckline or a validated break.
– Ignoring volume: a breakdown on weak volume is less reliable.
– Using the pattern in isolation: combine with trend analysis, support/resistance, and indicators for higher probability.
– Poor stop placement: set stops beyond logical invalidation points (recent swings) rather than arbitrary distances.
A practical step-by-step trading plan template (example)
1. Timeframe: choose (e.g., daily chart).
2. Confirm preceding uptrend (price has been trending higher).
3. Identify two peaks and draw neckline.
4. Watch for volume pattern (declining on peaks, rising on breakdown).
5. Confirmation rule: wait for a daily close below neckline.
6. Entry: enter short at close of breakdown or on retest rejection.
7. Stop-loss: place just above the higher of the two peaks (or above retest high).
8. Target: project pattern height downward; consider partial profit-taking at intermediate supports.
9. Position size: calculate so that the stop-loss risk = 1–2% of equity.
10. Post-trade: review outcome; log rationale and results.
When to avoid trading the pattern
– When the neckline break occurs on very low volume and without confirming indicators.
– When price breaks a neckline but macro news (earnings, central bank, major data) is likely to drive volatility and override the pattern.
– When the pattern is too subjective or peaks are far apart and don’t form a coherent structure.
Bottom line
The double top is a widely used bearish reversal pattern that gives traders a structured way to spot potential trend changes, set confirmation levels (neckline), and calculate targets. It is useful because it provides clear entry/stop/target mechanics, but it’s not infallible — confirmation, volume, indicator checks, and disciplined risk management are essential. Backtesting and consistency in how you define and trade the pattern are important to get reliable results.
Source
Adapted and summarized from Investopedia — “Double Top” by Laura Porter: https://www.investopedia.com/terms/d/doubletop.asp
If you’d like, I can:
– Provide a printable checklist or trade-plan template you can use on charts.
– Backtest a double-top rule for a specific stock or ETF and timeframe (requires historical data you can provide or allow me to fetch).