The double top
Two highs at a similar level with a valley in between. When the price falls below that valley, the rise counts as failed. Before that it's just sideways movement.
The double top looks like an M. The price runs into the same ceiling twice and doesn't get above it. Many read that as buyers giving up.
What it's about
After a rise the price reaches a high, falls into a valley, rises again to roughly the same level and fails again. As long as it stays above the valley, it could just as well make a third attempt and break through.
How to recognise it
- There was a clear rise beforehand.
- Two highs at a similar level, usually a few weeks apart.
- A clear valley in between.
- Only a close below the valley completes the pattern.
How the price target is estimated
The distance from the highs down to the valley is subtracted from the valley. Highs at €60, valley at €54: the target is around €48.
Where it misleads you
Two similar highs appear in almost every chart. Most never become a double top because the price doesn't even break the valley. Selling at the second high means trading a pattern that doesn't exist yet.
An example trade with made up numbers
Greta holds 50 shares bought at €70. The stock has failed at €90 twice, with the valley between at €84. Many people don't use a falling pattern for short selling but as a reason to sell or protect an existing position. So does Greta.
The decision: Greta sells when the stock closes below €84, at €83.50. After a €1 fee and a little spread, Greta locks in about €673 in profit.
If the pattern holds: The stock falls to €78. Greta avoided a €275 drop in value.
If it was a false breakout: The stock then rises to €92. Greta misses out on €425.
Greta didn't sell at the second high but waited until the pattern was complete. That costs a bit of profit, but she trades less often on imagination.
In studies, double tops are among the more common patterns. How often their target is reached depends heavily on how exactly the pattern is defined, such as how similar the two highs must be and how deep the valley must be.
The triple top follows the same logic with three highs. It's rarer, and telling it apart from an ordinary sideways phase is even harder.
Summary
- A double top is only complete with the break below the valley.
- Two similar highs alone aren't a signal.
- The target is the high to valley distance, subtracted from the valley.
Did you get it?
Highs at €60, valley at €54. Where is the estimated target?
Around €48.
Why shouldn't you act at the second high already?
Because the pattern isn't complete there and the price can also break through.
What's the pattern with three highs called?
Triple top.
Sources and further reading
- StockCharts ChartSchool, Double Top Reversal. View source ↗
- Thomas N. Bulkowski: Encyclopedia of Chart Patterns, 3rd edition 2021.
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- Double bottomChart pattern
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