Double Top Pattern
A Double Top Pattern occurs in uptrend when the price reaches a high point, retraces, rallies back to a similar high point, and then declines again. The low point of the retracement between the two peaks is marked with neckline. This line, when extended out to the right, is useful for trading and analyzing.
How to trade Double Top Pattern?
1. When the pattern has fully formed it means the uptrend is over, and a downtrend is likely underway. You may consider exiting long positions and focus on taking short positions.
2. Draw a neckline between the two retracement lows on a double top pattern, when the price drops below neckline it can also be used as an entry point. Also place a stop-loss order just above the high point of the second top.
3. Double tops also give an indication of how far the price could drop once the pattern completes. Take the height of the pattern and subtract that height from the breakout point of the pattern. For example, if a double top peaks out at $50, and retraces to $48, the pattern is $2 high. Subtract $2 from $48 to get a target price of $46. These targets can be used for analysis purposes, or to assess the potential.
There are also double bottom pattern, which is upside down versions of the above, and mark the end of a downtrend.