Double top indicates downtrend from "summary" of The Ultimate Guide to Chart Patterns by Atanas Matov,Steve Burns
A double top pattern is a chart formation often seen in the stock market, which can indicate a potential downward trend. This is recognized when the price of a security reaches a high point, pulls back, and then reaches the same high point again before declining.- The double top pattern is a commonly observed chart phenomenon which suggests the end of an uptrend and the initiation of a downtrend.
- As demonstrated by the double top formation, technical analysis is often used to intuit potential trend reversals allowing both buyers and sellers to properly adjust their strategies.
- This occurs when after rising for an extended period, price retests a prior high two separate times before declining.
- For those looking to capitalize on this trend reversal opportunity, it is important to verify that there is in fact a breakdown below the level of prior support rather than relying solely on the dual peak formation.
- When evaluating the context and possible implications of a double top trend, local highs and lows are also a critical component in determining if your expectations will be met.
- Traders should also however be cognizant of the potential for a false breakout which may result in losses if too many positions are taken near these areas.
- Shorts can benefit from taking a position near the first peak as price action may represent momentum shifting away from the recent uptrend.
- Stop loss levels and keeping risk small are key tools traders leverage to control their exposure to avoid outsized losses.
