What Does "Double Top" Actually Mean?

When an asset reaches a high price twice in a row with a slight price decline in between the two highs, a double top, a highly unfavorable technical reversal pattern, develops. 

The occurrence of multiple peaks is common in the financial markets. When the asset's price drops below a level of support equal to the midpoint between the two prior highs, it is confirmed.

A Double Top: What Does It Mean?

The formation of a double top might signal a shift in an asset class's medium- to long-term trend. The double top pattern that emerged in the Amazon.com, Inc. (AMZN) stock during September and October of 2018 at a price of $2,050 is depicted in the chart above. In this particular case, a considerable quantity of support increased approximately $1,880. The double top could not be confirmed until the stock fell below the $1,880 level, despite the fact that it fell nearly 8% from its peak in October to the support level. The share price continued to decline after that, eventually reaching a level that was nearly 31% lower.

In the example that follows, we'll utilize Netflix Inc. (NFLX), and in March and April of 2018, we may observe what appears to be the building of a double top. Contrarily, we can see that support is not broken and is not even tested in this instance because the stock price is rising in line with an uptrend. Conversely, if one scrolls farther down the chart, the stock looks to create what appears to be a double top in the months of June and July. The pattern does, however, turn out to be a reversal pattern this time, as demonstrated by the price dropping below the $380 level of support, which ultimately led to a plunge of 39% to $231 in December. Pay note to the fact that the support level at $380 worked as a barrier to the stock's upward trend twice in the month of November.

Double Top vs Failure Triple Top

In reality, there is a significant difference between a double top and an unsuccessful attempt. A true double top is a very unfavorable technical pattern that can result in a sharp decline in the price of a stock or asset. Such a decline could be extremely damaging. 

But in order to identify a double top, it's important to exercise patience and identify the vital support level. If you merely use the appearance of two successive peaks to identify a double top, you run the risk of getting an inaccurate reading, which could cause you to leave a trade too soon.

Dual Tops Restrictions

Like any other chart pattern, double top and double bottom patterns are prone to failure. The incorrect break out of the neckline is the most significant. Price usually breaks the neckline only to reverse course and carry on in the direction of the earlier trend. Instead of waiting for prices to retrace and retest the neckline, many traders enter the trade immediately after a neckline break.

The tops and bottoms of the designs are not regular and do not take the form of predetermined shapes. They vary slightly according on the pattern's timing, price momentum, and market volatility. Many traders might identify incorrectly or possibly not at all.

Even before the pattern is finished, many traders enter it at the midpoint, which is the intersection of the neckline and the highest top point.

The patterns are calculated using other technical or risk management techniques rather than offering a take profit point.