Reversal Chart Pattern: Double Tops
Double tops or double tops are bearish reversal patterns that often indicate the end of an uptrend and the start of a downtrend. It consists of two successive peaks that reach the resistance level at a value equal to or equal in height, with the valley separating the two peaks. The valley depth is important for the purpose of price projection, but the peak-peaked shape is unimportant although some traders talk about or often call it the peak of Adam and Eve. Trading volume is also important, with volume at the second peak lower than the volume at the first peak.
Sometimes, a double top pattern may form a third top level, creating a triple top pattern.
The double tops pattern has two entry signals for selling positions. The first signal is given when the price failed to break the previous resistance level at the high level of the first peak. However, this is a tentative (uncertain) entry because the price may come back before it reaches the support level between the two peaks and gives a continuous signal of the ascending trend.
The second entry signal is a more reliable signal. It is given when the previous support level that appears when the correction (retrace) from the first peak is penetrated. This breakout motion should occur at higher volumes because a decrease in volume may indicate a false breakout or false penetration.
The price projection for the double tops pattern can be calculated by taking the distance from the support level that formed during the correction from the first peak to the high level at the top and subtracting it from the point where the support level is then broken. However, the price will usually try to retest the previous support level, which will now be the resistance level (after the support level is broken) and may even break slightly above this level before the downtrend is in effect. If the resistance level is broken at a strong volume you should be alert and may be an indication of the exit level of your trading and reenter when the price falls back below the resistance level.