A double top is generated when an asset reaches a high price two times in a row with a modest price fall in between the two highs. This is a very negative technical reversal pattern.
In the financial markets, double peaks are extremely common. It is validated when the asset's price falls below a support level equal to the low that occurred between the two previous highs.
The emergence of a double top may signify a change in the medium- to long-term trend of an asset class. The double top pattern visible in Amazon.com, Inc. (AMZN) stock that emerged between September and October of 2018 around a price of $2,050 is depicted in the chart above.
In this case, the level of support that grew around $1,880 was enormous. Despite the fact that the stock declined about 8% from its peak in October to the $1,880 support level, the double top could not be confirmed until the stock fell below the $1,880 level.
Following then, the price of the shares fell further, eventually reaching a level that was about 31% lower. 1
In the following image, we will use Netflix Inc. (NFLX), and we can see what appears to be the construction of a double top in March and April of 2018.
In comparison, we can see that support is not breached and is not even tested in this case, as the stock price continues to rise in line with an uptrend.
However, if one scrolls down the chart, they will observe that the stock appears to form what appears to be a double top in the months of June and July.
However, this time the pattern proves to be a reversal pattern, as indicated by the price falling below the support level of $380, resulting in a 39% loss to $231 in December.
Take notice of how the $380 support level acted as a roadblock to the stock's upward rise on two distinct occasions in November.
There is, in fact, a crucial distinction to be established between a double top and a failed attempt. A real double top is a highly unfavorable technical pattern that can result in a significant drop in the price of a stock or asset. This type of deterioration can be extremely damaging.
However, in order to confirm the identity of a double top, patience and the location of the critical support level are required. If you determine a double top solely on the appearance of two successive peaks, you risk receiving an incorrect reading, which could cause you to exit a position too soon.
Double top and double bottom chart patterns can also fail. False neckline break is the most critical. Price breaks the neckline, then retraces and resumes the prior trend.
Instead of waiting for prices to draw back and retest the neckline, many traders leap in on a neckline break.
Pattern tops and bottoms aren't uniform or pre-defined. Variations rely on market volatility, price momentum, and pattern timing. Many traders fail or don't identify.
Many traders enter the pattern at the middle, halfway between the neckline and the highest top point, before it is complete.
The take profit point is calculated using various technical or risk management tools.
