Chart Pattern #2: Double Top
The double top chart pattern is the one-two knockout punch for the bull market. That’s because it’s a technical reversal that signals the start of a bear market.
It is formed when an asset reaches the highest price point two times in a row. However, the identical price points are separated by a minimum price known as the support level.
Think two peaks separated by a valley as you can see below.
This happened with Amazon (AMZN) when it reached a double top of $2,050 separated by a support level of $1,880.
But because this was a hard double top, the price tanked a further 31%.
What Does That Mean for You?
Once a double top is confirmed that means a huge drop in the price of the asset is almost certain. Buyers have flooded the market, but they’ll eventually learn no one is willing to trade at that price.
As a result, there’s more supply than demand.
And whenever that happens, you get panic and a sudden influx of sellers, which leads to a fall in price.
However, a formation of the double top is not always the case. The key is to look at the support level and determine if there will be a break or further drop in price of the asset.
Regardless, set your stop losses. And make sure you’re following your entry and exit strategy.
Once you understand this pattern, you’ll know how to position yourself for a good entry and exit. It all comes back to whether you’re going to be a bull, bear, or pig.
And by now, you know what happens to pigs.
How To Trade a Double Top
Making money off a double top comes down to:
- Position size
- Entry and exit strategy
- Indication of volume between the double tops and support level
Use these factors as consideration.
The Risks Involved
Double tops are not always what they seem. They’re not as easy to confirm because you have to determine if the support level will break.
And that takes time, skill and patience.
If you don’t get it right, it devastates your profits. You could exit too late or too early based on a false reading.