Patterns on a chart are recognizable forms generated by the values of securities at various times in time. A pattern is indicated by a line that connects several price points throughout time, such as opening prices, highs, and lows.
These pricing points may also include closing costs. Chartists use data patterns to generate educated predictions about where prices will go in the future. Patterns, which serve as the cornerstone of technical analysis, serve as its foundation.
There are several trading patterns that indicate the market's bullish or bearish condition.
A bearish reversal pattern is a double top. It is made up of two peaks on a support level known as the neckline. Following a strong bullish trend, the first high will eventually retrace to the neckline.
Once it reaches this level, the momentum will shift back to bullish in order to build the second high.
The trend must retrace more than it did following the initial pullback after the first peak for the double-top pattern to be confirmed.
This usually means that the price momentum has broken through the neckline level of support and that the bearish trend will continue for the foreseeable future.
Traders that use the double-top pattern in their trading will often try to construct a short position at the second peak in anticipation of the bearish reversal that the pattern occasionally indicates.
If you don't know what action to take, a pattern isn't going to help you. Patterns are divided into two types: continuation patterns and reversal patterns.
The double-top chart pattern indicates a strong bearish reversal. It denotes the end of a lengthy rally. A double-top chart, as the name implies, consists of two highs separated by a low.
When the price goes below the support level following the second top, the double top pattern is confirmed. The support level is the lowest point reached between the two peaks.
The creation of the second top marks the end of the double top pattern. Following the creation of the second top, there are two alternatives.
The double-top pattern does not emerge if the bulls retake control and do not allow the price to go below the support level.
The double top pattern is verified if the bears prevail and the price goes below the support level, which was reached at the low between the two tops. It is an extreme reversal signal, and one should ideally short the security.
It is critical to examine a few criteria while taking action based on the double top formation.
Broader trend: The double-top pattern indicates a bearish trend reversal. It is only beneficial if established after a larger bullish trend. The bullish trend preceding a double-top formation should be at least three months longer.
A double-top pattern following a brief rise should be avoided.
Height: The height and depth of a double-top structure should be unique. While there are no well-defined criteria for the height or depth of a double-top design, a 10% difference is preferred.
Double-top patterns with deeper lows are seen to be a stronger reversal indication. However, deeper patterns may take longer to establish.
Width: The tops can only be detected if the time gap between their development, commonly known as the width, is large enough. While the disparity between the two peaks might last months or years, it should be at least one month.
Volume: The trade volume is one of the most powerful signs that confirm the establishment of the pattern. The volume of the second top is often less than that of the first.
If the volume of the second peak is more than or equal to that of the first, the reversal may not hold, and the rally may continue.
The use of the double bottom and double top patterns in the financial market has various advantages.
First, as previously said, they are quite simple to recognize. You only need to perform a visual inspection and build trendlines using the trendline tools provided by your trading platform.
Second, while employing the double top and double bottom, it is simple to include additional trading tools. As you can see, we quickly applied the Fibonacci retracement principle.
Furthermore, technical indicators such as the Relative Strength Index (RSI), momentum, and the Relative Vigour Index are quite simple to utilize (RVI).
Third, while the double top and bottom are not always correct, they frequently provide favorable outcomes. This is due to the fact that the notion has been ingrained in the brains of other financial traders.
Traders and investors can benefit from exiting a position with the aid of the double top pattern by doing so before the value of the asset experiences a big decrease.
Only in conjunction with other chart patterns and indicators, such as volume, height, and width, is it possible to take any kind of action based on the double-top chart pattern.
Read More From ForexScopes:
Making Money With The Double Top Pattern
How The Double Top Pattern Is Structured! -ForexScopes
