The double top pattern is a common chart formation that investors use to identify potential reversal points in a security or market. The pattern is formed when the price of security creates two consecutive peaks, with the valleys between them being roughly equal in size. Many traders use this pattern to signal a trend reversal, and oftentimes it can lead to profitable trades. In this blog post, we will discuss the double top pattern meaning and its importance!
Published on 31 January 2023
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What is Bearish Reversal?
Now, before moving any further, it is vital to first understand what a bearish reversal is about. It occurs at the end of an uptrend and indicates a fall in the price, which means that the sellers will take over the buyers. With a decrease in the price, the traders would sell their stocks in the market.
Note:A bear market occurs when the prices fall, and traders sell stocks.
A bull market occurs when the prices rise, and traders buy/withhold their stocks.
There are certain pros and cons of the bearish pattern, such as-
Pros-
It is easily interpreted and recognized.
It is the best way of predicting the accuracy of the market.
It is used as a technical analysis tool to determine the marker.
This trend is easy to combine with other technical indicators.
Cons-
There is no guarantee regarding market trend reversal.
It is crucial for you to be patient and find the support level to identify the double top.
It can give a false reading and early departure based on the two successive peaks.
When you're trading according to the bearish reversal pattern, it involves some amount of risk. If you see the market falling rapidly, you can trade. Although, before trading, you need to wait for a few days since there has been a potential shift in the stock market.
What is a Double Top Chart Pattern?
A double top chart pattern is a reversal pattern that occurs when a price touches two relative highs, with a small decline occurring between the two. The pattern is complete when the price line breaks through the support level. The support level is the price range that the assets maintain for a brief period of time. Hence, it is important for traders to validate the reversal chart patterns and other indicators, such as volume.
The double top pattern can spare traders from any hefty losses. When integrated with other tools, this pattern can help predict market direction and create a profitable trading strategy for the traders. It is a common occurrence towards the end of a bullish market when the price rises.
What Does a Double Top indicate?
There are two peaks or tops in the pattern. However, the second top does not break the high of the first top. It indicates that a reversal is approaching, and purchasing pressure is near its end. The double top indicates a descent, meaning the entry trade shall begin under the neckline. It results in a downtrend, making traders cautious about booking profits before there is a decline.
There are two highs with a low in between and the volume amplifies after the support level is breached by the price line. The double top pattern is a negative technical pattern that can lead to a sharp drop in stock prices or assets.
Rules Related to Double Top Pattern
There are specific rules when you're trading with a double top pattern. These rules are-
Remember that the double top pattern is formed at the end of an uptrend. So, the prior trend should be an uptrend.
The tops that are formed traders should know the size of those tops.
Only when the price breaks out from the neckline should traders enter the short position. A neckline is when two peaks are formed above a support level
Conclusion
The double top pattern is a great indicator that assists traders and makes them exit a position much prior to even when the price of an asset falls significantly. However, a double top pattern will be useless without patience and attention to detail. The best way to interpret the double pattern is to simultaneously check the support level and monitor the rising volume.
Also, traders need to know that a double top pattern is best only for the times when they are entering a short-term trade.
It is imperative for traders to know that a double top pattern cannot be used on its own. A lot of other things are also to be put into consideration before making any decision.
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The core maxim of investment is to set realistic expectations regarding returns, so you can plan your goals and achieve them. A simpler way to understand the importance of assuming practical returns on investment is through an example.
Difference Between Large Cap and Medium Cap in Stock Market
Choosing the right stocks for trading and investment purposes can be a little difficult and tricky, especially when you are only starting your journey in the stock market. But is it all that difficult? Not if you know what parameters you need to select your stocks.
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The core maxim of investment is to set realistic expectations regarding returns, so you can plan your goals and achieve them. A simpler way to understand the importance of assuming practical returns on investment is through an example.
Difference Between Large Cap and Medium Cap in Stock Market
Choosing the right stocks for trading and investment purposes can be a little difficult and tricky, especially when you are only starting your journey in the stock market. But is it all that difficult? Not if you know what parameters you need to select your stocks.
Employees play an important role in the growth and development of a company. They are a driving force that keeps the company going. The efforts and diligence of employees is the key component for the expansion and success of a business.
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