Let’s learn how to identify these chart patterns and trade them.
A double top is a reversal pattern that is formed after there is an extended move-up.
The “tops” are peaks that are formed when the price hits a certain level that can’t be broken.
After hitting this level, the price will bounce off it slightly, but then return back to test the level again.
If the price bounces off of that level again, then you have a DOUBLE top!
In the chart above you can see that two peaks or “tops” were formed after a strong move up.
Notice how the second top was not able to break the high of the first top.
This is a strong sign that a reversal is going to occur because it tells us that the buying pressure is just about finished.
With the double top, we would place our entry order below the neckline because we are anticipating a reversal of the uptrend.
Neckline on a Double Top
Wow! We must be psychic or something because we always seem to be right!
Looking at the chart you can see that the price breaks the neckline and makes a nice move down.
Remember that double tops are a trend reversal formation so you’ll want to look for these after there is a strong uptrend.
You’ll also notice that the drop is approximately the same height as the double-top formation.
Keep that in mind because that’ll be useful in setting profit targets.