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A double top in a stock or index price is a sign that investor sentiment has changed, and a trend reversal is about to occur.

Technical analysis in stock trading is checking charts and related indicators for price and volume patterns that suggest times to buy or sell stocks. Patterns can form over any time period, including single and multiple periods. One pattern that traders especially look for is the double top.


Characteristics of a Double Top

A double top is when a stock (or market) price reaches two peaks at about the same price with a lower price period in between. A typical part of a double top is lower volume on the second peak.


Basic Peak: The first new high should mark the top of the latest trend. This peak is generally acceptable and normal in an uptrend. There is no concern about position at this moment in time.

Trough: Following the first new high (top 1), a retraction in price occurs and its range is approximately 10-20%. Due to the decline from the first high the volume is generally regarded as insignificant.

Succeeding Peak: To make sure a convincing double top has formed, it is all-important that the volume declines briskly as the share rate attempts to retest the recent new high (top 1). It should be anticipated that resistance will be met upon the retest. This pattern still needs confirmation at this stage.

Price Target: broadly, a good indication is the following calculation – by measuring the distance between the sustain break level to the peak and then subtracting it from the sustain break. This will give you the approximate price target. Predictably this gives the trader an understanding, the larger the structure the greater the potential for an expensive decline in price. Anticipated swing trades are executed at breakpoints through to reaction lows, although it is more common to let the share price fall lower than the reaction low. It is potential to achieve a rally back up to the response low. This is the most appropriate time to begin to trade the share short. You will want to place a stop order precisely above the response low. It is acceptable to sell into the market to the first top; you will need to place the stop loss just above that top.


Double top pattern



What Does a Double Top Signify

S A double top or bottom is simply when a stock's price hits the same high or low twice at the same level. It usually indicates strong support or resistance for a stock depending if it is a high or a low.


If it is a double top this leads to strong resistance.

If it is a double bottom this leads to a strong area of support.

One thing to keep in mind is the duration of the stock chart you are looking at. A double top on an intra-day chart does have a different meaning than a double top on a yearly chart. One must use the appropriate chart depending on ones trading horizon. A trader who like to hold for long periods would not in general us an intra-day chart. A day trader will focus more on the short term chart, but must also keep in mind long term support and resistance as they are considered more robust. Another key point is to put in some checks and balances for any trading indicator. Bollinger bands are commonly used to put in price stops to limit losses should the support or resistance indicated not hold.


Key Points in a Double Top Formation

The intermediate low, the second high, and the drop below the intermediate low are the key points to look for in the double top. Of course, you won’t be able to recognize a double top is forming until the second top forms and the price drops back to near the intermediate low. Until that happens, the stock or index might just be experiencing another pullback in the uptrend.

Once the double top appears to be forming, look at the volume traded during the second high. If it is the same or higher than the first high, then investors really haven’t signaled that the stock is over-valued or over-bought. Lower volume on second his is a key component of the double top.

Once the stock price falls below the intermediate low, it is likely to continue falling until a point of support is reached. This point is often about the same amount below the intermediate low as that low was below the peaks. That’s not firm, however. Stock prices can obviously drop lower. On occasion, when support points are close together, the drop below the intermediate low might not be that low after all.

A double top is a powerful indicator of a change in investor sentiment. However, as with most things in stock trading it is not foolproof. Stocks can make what appear to be double tops, only to reverse and continue to new highs. Be cautious about trading the double top. Take time to review charts and become familiar with how the market or stock price moves. Be aware of news events, and the overall direction of the market.


Market Technical Analysis - Double Top Approaches...How To Read It? Plays, Profits




Understand the Double Top (Reversal) Pattern



  1. Establish Trend – The Double Top like any other reversal pattern must have a long term established trend to reverse. Double Tops have to be formed after a significant uptrend.
   2. First Peak – This will be the high of the price action after the significant uptrend and you will sometimes see price action testing this area before creating the neckline/trough.
   3. Neckline/Trough – After the first peak has been rejected and price action starts pulling back to an area of support, you will sometimes see a decline in demand which is shown in the volume.
   4. Second Peak – Now the area of support has been created the price action can now begin to test the price action of the first peak. Some analysts require price action to be within 3% either side of the first peak price but we think it is entirely up to the individual trader-within reason!
   5. Support Break – Now that the second peak has been establish and price has been rejected, price will fall to the support area. As the channel has normally been created over a 2 month period, the support area will more often than not be tested a few times before breaking. Only after the support has been broken and the price action has closed under support can we be sure that the pattern is confirmed.
   6. Resistance –] What was support now becomes resistance and often this will be tested by the price and rejected. This is the chance for you to either exit all long positions from previous uptrend or enter your short position in the market.


Courtesy: Hubpages.com

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