Double Top
A double top is an extremely bearish technical reversal pattern that forms after an asset reaches a high price two consecutive times with a moderate decline between the two highs. It is confirmed once the asset's price falls below a support level equal to the low between the two prior highs.
Double Top
Definition
A double top is a highly bearish technical reversal pattern that forms when an asset reaches a high price twice consecutively with a moderate decline between the two highs. It is only confirmed as a double top when the asset's price falls below the support level between the two previous highs.
Origin
The concept of the double top pattern originated in the early stages of technical analysis, dating back to the early 20th century. Pioneers of technical analysis, such as Charles Dow and William D. Gann, observed this reversal pattern through historical market data and applied it to market predictions.
Categories and Characteristics
The double top pattern mainly falls into two categories: standard double top and complex double top. The standard double top has two roughly equal highs, while the complex double top may include multiple highs but still resembles the double top pattern overall. Key characteristics of the double top pattern include:
- Two Highs: The price shows a significant pullback between the two highs.
- Support Level: The low point between the two highs forms a critical support level.
- Confirmation: The double top pattern is only confirmed when the price breaks below the support level.
Specific Cases
Case 1: Suppose a stock reaches a high of 100 units, then pulls back to 90 units, and rises again to 100 units forming the second high. Subsequently, the price breaks below the 90-unit support level, confirming the double top pattern, indicating a potential further decline in price.
Case 2: In the forex market, a currency pair reaches a high of 1.2000, pulls back to 1.1800, and then rises again to 1.2000 forming the second high. Subsequently, the price breaks below the 1.1800 support level, confirming the double top pattern, indicating a potential further depreciation of the currency pair.
Common Questions
1. How to distinguish a double top from other reversal patterns?
The key to the double top pattern is the two highs and the support level in between, while other reversal patterns like the head and shoulders have different structures.
2. Does the double top pattern always indicate a price decline?
Although the double top pattern usually indicates a price decline, market conditions are complex, and investors should use other analytical tools for confirmation.
