What Is the Meaning of the Term "Double Top"?

A double top is a very unfavorable technical reversal pattern that occurs when an asset reaches a high price twice in a row with a small price decline in between. 

Frequent double peaks are observed in the financial markets. It is confirmed when the asset's price falls below a support level equal to the lowest point between the asset's two previous highs.

What does it mean to have a double top?

The formation of a double top may signal a change in the medium- to long-term trend of a particular asset class. The following chart depicts the double top pattern that formed in Amazon.com, Inc. (AMZN) shares during September and October 2018 at a price of $2,050. In this scenario, the amount of support that grew to almost $1,880 was enormous. Even though the stock fell around 8% from its October high to the support level at $1,880, the double top was not confirmed until the stock fell below $1,880. Following then, the share price declined progressively until it reached a level that was 31% less than its previous value.

In the scenario that follows, we will use Netflix Inc. Since the stock price is rising in accordance with an uptrend, we can note that support is neither broken nor even tested. Scrolling further down the chart reveals that the stock appears to create what appears to be a double top in June and July. 

As evidenced by the price going below the $380 level of support, which ultimately resulted in a 39% decrease to $231 in December, the pattern is a reversal pattern this time around. Also, pay attention to how the $380 support level behaved as a barrier to the stock's upward trajectory twice in November.

Contrary to Double Top, Unsuccessful Double Peak

In reality, there is a significant distinction between a double top and an unsuccessful attempt. A true double top is an extremely negative technical pattern that can lead a stock or asset's price to decline drastically. Such a decline could be extremely damaging. In order to identify a double top, however, it is essential to exercise patience and locate the vital support level. If you identify a double top based just on the sight of two successive peaks, you run the risk of obtaining an inaccurate reading, which could cause you to leave a trade prematurely.

Double Tops Limitations

As with any other chart pattern, double top and double bottom formations are susceptible to failure. The most significant flaw is the incorrect neckline break. Price tends to breach the neckline before retracing and continuing to move in the direction of the prior trend. Rather than waiting for prices to drop back and retest the neckline, many traders enter the trade immediately after a neckline break.

The tops and bottoms of the patterns are not uniform and do not occur in predetermined forms. They vary slightly based on market volatility, price momentum, and the timing of the pattern's appearance. Numerous traders may incorrectly identify or fail to identify.

Many traders enter the pattern at the midway, which is halfway between the neckline and the highest top point, even before the pattern has been fully formed.

The patterns do not include a take profit point; rather, they are computed using other technical or risk management techniques.