Double Top Pattern: A Powerful Bearish Reversal Signal
The Double Top Pattern is a popular and reliable bearish reversal candlestick chart pattern used in technical analysis. It signals that an uptrend is likely to reverse and a downtrend may follow. This pattern is formed after a strong bullish trend and is shaped like the letter “M”.
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What is a Double Top Pattern?
A double top pattern occurs when the price of a stock or asset creates two consecutive peaks at approximately the same price level, with a moderate decline between them. This suggests that the asset is facing resistance and failing to break higher.
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- First Top: The price reaches a peak and then declines.
- Second Top: The price rallies again but fails to surpass the previous high.
- Neckline: The support level between the two tops. A break below this confirms the pattern.
How to Trade the Double Top Pattern
Here is a step-by-step guide to trading the double top pattern:
- Wait for Confirmation: Do not enter until the price breaks below the neckline.
- Entry Point: Enter a sell (short) position after a confirmed breakdown below the neckline.
- Stop Loss: Set your stop loss just above the second peak to minimize risk.
- Target Price: Measure the height from the neckline to the tops and project it downward from the neckline for a target.
Example
Suppose a stock peaks at ₹500 twice and forms a neckline at ₹450. After the second peak, the price breaks below ₹450:
- Entry: ₹448 (below neckline)
- Stop Loss: ₹502
- Target: ₹450 - (₹500 - ₹450) = ₹400
Key Points to Remember
- The pattern is more reliable in higher timeframes like daily or weekly charts.
- Volume tends to decline on the second top and rise on the breakdown.
- Wait for a clear break and close below the neckline before acting.
Conclusion
The Double Top is one of the most effective bearish reversal patterns in technical analysis. When traded with proper risk management and confirmation, it can offer high-probability trade setups.
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