The double top pattern, also known as the "M" pattern, is a common technical formation characterized by two relatively close peaks with a connecting low point, forming a shape resembling the letter "M."
The double top pattern suggests a potential price reversal and a downtrend.
Key characteristics of the Double Top Pattern include:
Two similar peaks: It consists of two peaks that are similar or close in height.
Connecting low point: There is a low point that connects the two peaks.
Occurs in an uptrend: The Double Top Pattern typically appears during an uptrend, indicating a potential slowing of the upward momentum.
Breaks through support line: When the price breaks below the support line connecting the two "M" formations, the Double Top Pattern is confirmed, suggesting a possible downtrend.
Changes in trading volume: Usually, the trading volume is lower at the second peak, indicating increased selling pressure.
As the Double Top Pattern suggests a possible price reversal and downtrend, it can be used to identify potential turning points and make corresponding trading decisions.
However, it is essential to note that relying solely on the Double Top Pattern may not be sufficient to make reliable trading decisions; it should be combined with other technical indicators and trends for comprehensive analysis.
Here's an example to help you better understand the Double Top Pattern:
Netflix Inc. (NFLX): A clear Double Top Pattern was observed between October and December 2021. When the price broke below the support line, the Double Top Pattern was confirmed, and the stock price started to decline.
Source：Tiger trade app
When observing the Double Top Pattern, pay attention to the following points:
Confirm the peaks: Look for two peaks that are close or equal in height, as this is a key characteristic of the Double Top Pattern.
Observe the low point: Pay attention to the low point connecting the two peaks, usually forming a horizontal or slightly inclined support line.
Break of support line: Watch for a price break below the support line, which could be a sell signal, indicating the potential for further downward movement.
Trading volume: Observe the changes in trading volume, as lower volume during the second peak suggests reduced market interest.
Confirm trend reversal: In addition to the formation of the Double Top Pattern, investors should also watch for other confirming signals of a trend reversal, such as a break of a downtrend line or changes in other technical indicators.
In summary, when using the Double Top Pattern as a trading reference, it is essential not to rely solely on this pattern but to combine it with other technical indicators and trends for comprehensive analysis. Additionally, timely stop-loss and proper risk management are crucial aspects to consider.