What Is the Meaning of "Double Top"?

A double top, a highly unfavorable technical reversal pattern, arises when an asset reaches a high price twice in a row with only a minor price decline in between. 

Double peaks are common in the financial markets. It is confirmed when the price of the asset falls below a level of support equal to the low point between the preceding two highs.

What Is the Meaning of a Double Top?

The formation of a double top could indicate a shift in an asset class's medium- to long-term trend. The chart above depicts the double top pattern that formed in Amazon.com, Inc. (AMZN) stock during September and October of 2018 at a price of $2,050. In this exact scenario, the amount of support climbed to roughly $1,880. Although the stock fell nearly 8% from its peak in October to the $1,880 support level, the double top could not be verified until the stock fell below that level. Following then, the share price fell progressively until it reached a level that was more than 31% lower.

We'll use Netflix Inc. (NFLX) as an example, and we can see what appears to be the formation of a double top in March and April of 2018. In contrast, because the stock price rises in line with an uptrend, we can see that support is not broken and is not even tested in this situation. If one scrolls farther down the chart, the stock looks to create what appears to be a double top in the months of June and July. The pattern does, however, appear to be a reversal pattern this time, as evidenced by the price falling below the $380 level of support, resulting in a 39% decrease to $231 in December. Take note of how the support level at $380 behaved as a barrier to the stock's upward trajectory twice in November.

Unsuccessful against. Double Top Double Crown

In reality, there is a significant difference between a double top and a failed attempt. A true double top is a very unfavorable technical pattern that can lead a stock or asset's price to plummet substantially. Such degeneration could be disastrous.

However, it is necessary to be patient and locate the critical support level in order to determine the identity of a double top. If you identify a double top only based on the appearance of two successive peaks, you risk receiving an inaccurate reading, which could cause you to leave a trade too soon.

Limitations for Double Tops

Like any other chart pattern, double top and double bottom patterns are prone to failure. The most notable is the incorrect break out of the neckline. Price usually breaks the neckline just to retrace back and continue moving in the same direction as the previous trend. Rather than waiting for prices to pull back and retest the neckline, many traders enter the trade immediately after it is broken.

The tops and bottoms of the designs are not uniform and do not occur in preset shapes. They vary slightly depending on market volatility, price momentum, and the time the pattern occurs. Many traders will either misidentify or fail to identify.

Even before the pattern is completed, many traders enter it at the midpoint, which is the midway point between the neckline and the highest top point.

The patterns do not provide a take profit point, but are calculated using other technical or risk management methods.