Double Top
A technical indicator, a double top is a bearish reversal pattern that appears on a price chart, signalling that the asset’s price is likely headed to a downward trend in the medium- to long-term period after reaching a certain high twice. In short, a double top is a reversal pattern after an extended move upwards.
The tops are the peaks formed when the price hits a certain level that cannot be broken with a retracement between the first and second top. The two peaks are roughly equal in height. The first peak indicates that the price reached a high and then slightly pulled back.
The price then declined from the first peak, usually to a level of support, before rising again, reaching approximately the same level as the first peak but struggling to break above it, forming the second peak. The support level between the two peaks is often referred to as the neckline.
After the second peak, the price typically declines again. If it falls below the neckline, the double top pattern is confirmed. Volume typically decreases on the second peak, indicating weakening buying pressure.
The potential price drop can be estimated by measuring the distance between the peaks and the neckline, then subtracting this from the neckline level. Traders may use this pattern to identify potential selling opportunities or to set stop-loss orders to protect against a downside move.
Key Takeaway
A bearish technical indicator, a double top forms when an asset price reaches a high price two consecutive times with a moderate decline between the two highs.