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    Dennis Y.

    Crypto Trading ABCs: Double Top Chart Pattern Full Guide

    Double top chart pattern guide

    In our series of Pattern Guides, we have come to another remarkably popular pattern, which can be found in the publications of many analysts. Even experienced players are referring to it as soon as they manage to find it.

    Let's find out: is it bullish or bearish, how accurate is this pattern? And what's the best way to find it?

    Basically, this figure is great for the arsenal of every single trader. It is a universal figure for different industries.

    How to Identify Double Top Pattern

    This shape (hereinafter the "DT") is a typical indicator considered to be pessimistic/bearish/reversal, you name it. It is formed when the price moves up and up, then it comes to the same highest mark for the 2nd time without breaking through it. 

    It's generated near the resistance line and represents a situation of the weakness of buyers and fails to break through the resistance twice.

    It consists of 2 tops almost on the same level (looks like "M" letter). They are separated by some sort of "a low place" that completes a "neckline". Again, the 2nd peak doesn't exceed the height of the 1st peak. It means the failed attempt to rise outside the maximum. The impulse exceeds the "neckline" with a culmination after that completes the whole DT body.

    This shape is constituted when price enters a sideways movement before strong reversal. While this, we may see bouncing off the local minimums and maximums without making any significant advances in any direction.

    This suggests that bulls do not have enough strength to break through the resistance/barrier zone, and it looks rational. As buyers don't have the strength, then the initiative proceeds to the stronger sellers. In any case, it gives a rebound from the "wall" and a downward move. Well, if the dominance of the sellers becomes particularly powerful, then the price shifts into increasingly lower areas.

    How to identify double top pattern

    A weakening momentum can be confirmed by a lagging high on the oscillator chart, such as the RSI. Although it is not a necessary factor, the price can break above the 1st peak in the short term. A small and temporary break above the first peak is considered to be preferable for supposed "whales" or manipulators, as it can attract bullish buyers before the subsequent reversal and fall.

    A break below the neckline confirms the appearance of this figure. A bearish breakout is defined due to a break of the strong neckline zone.

    Pay attention: if the 2nd height/top is a bit lower than the 1st one, it is a clear alert that the resistance most likely is not be broken through.

    The DT shape also has a "mirrored" twin form, aka a double bottom, while we will talk about that in our next guide.

    5 steps to clearly and easily determinate a DT shape:

    • Identify 2 isolated heights of equal (or almost equal) maximums.
    • The span from the 1st height to the 2nd one is normally not too tight (it depends on the TF).
    • Visualize in your mind the presence of a neck level.
    • Check the boost of trading volumes when the key zone is breached.
    • Use other tools and numerous indicators to reinforce the sign of the DT is coming (MAs + oscillators, like RSI divergence).

    Double Top Chart Pattern Target

    The Take Profit Point is calculated due to the fact of the breached area discovered with the numbers' interval inside the DT shape. The target can be predicted by measuring the height of the whole shape and projecting this level down.

    Let's examine this deeper in terms of traders' perspectives.

    How to Trade Double Top Chart Pattern

    Traditionally, this shape is looked at from the 1H and higher TF. In general, it is better to look at time frames from 4h because there is more noise on smaller TF's.

    The zone, where both heights/tops are discovered, represents an area of a huge supply of the asset. That means: the wall of limit orders to sell is so large that any attempt to "dissolve" it with market buying orders is finished in a quite obvious way: purchases are satisfied, and the wall of limit orders is still strong enough to keep the price from going higher.

    When these patterns develop, reversals often occur. Trading in these conditions should be done with caution.

    A double top looks like this: the price goes up after it reaches the reversal point, it makes a small correction, after that the price rebounds and then goes up by the same reversal point. Then the price corrects again.

    It's a good decision to review this shape after the neckline was breached and retested.

    Remember, the DT figure doesn't always look like in the textbook, sometimes they are difficult to recognize. The heights may be on different levels, one may be a little higher/lower. The neckline may not be strictly horizontal.

    How to trade double top chart pattern

    From the screenshot, we may recognize the 2nd top is more elevated than the 1st. Also, between them, there are intervals of the certain temporary price that shows some growth. However, the pattern still worked out quite accurately. After breaking the neckline, the price went down. And in general, the trader had a good opportunity to fix the profit on the short positions at the lower point of the chart (or when the decrease in activity is detected, the downfall impulse loses its power and stops and there are signs of a reversal show up).

    Sell alerts:

    • Breaching the support line and fixation under it.
    • Breaching the support (which has become resistance) from the bottom, also known as retest.

    The amplitude of price fall is usually equivalent to the height of the DT figure itself. In addition, we recommend looking for DT only after a strong trend.

    Conservative traders more likely will search for additional confirmation, and aggressive traders enter a bearish position after the 2nd peak.

    Entry into a market position is divided into three categories according to risk:

    1. Entry from the highest level of both tops (average risk)

    The trader can jump in after the building of the 2nd peak to earn on a significant downward movement, and not get the proof.

    The stop orders (SL) may be specified at the maximum of the 1st height or behind the resistance line.

    2. Entry by a breakdown of the support line (low or acceptable risk)

    SL is positioned behind the important bottom level, usually near the middle of the shape.

    The start point for the trade will be affirmed after finishing under the neck line, with SL behind this line. Fibonacci tool can also be helpful to understand all key numbers and lines.

    3. Entry on a pullback after breaching the support line (minimal risk)

    SL is specified behind the penetrated lower level.

    Thus, the DT figure is used in combination with other tools which strengthens and reinforces the whole point of view.

    A Fresh High-Profile Example of the Doible Top Chart Pattern

    One of the most resonant mentions in the crypto community and even in the global media relates, expectedly, to attempts to see this pattern in Bitcoin's behavior this winter.

    Back in early December, Peter Brandt warned the crypto public that a dangerous DT shape was forming on the Bitcoin graph, indicating a trend change and a possible transition of the asset into a bearish phase. Brandt also noted that the DT will not work until it completes its formation. But once it's defined, the market is likely to experience a long period of depressed sentiment.

    Double top pattern - example

    As we can see from further developments, the optimism on the rebound was very weak, and further on the trend really looks more and more bearish.

    Bottom line

    DT pattern is a very popular and straightforward figure, which obeys quite transparent and logical laws of market movement. It displays the balance of power of buyers and sellers, with the subsequent victory of sellers.

    In contrast to the complicated patterns with fancy names that do not really work well in the crypto market because they are too obscure (and sometimes farfetched), this pattern usually proves to be very good.

    In the next review, we will talk about its inverted version, known as Double Bottom. 

    The content of this article is for informational purposes only and should not be construed as investment advice. We ask you to do your research. This text is not a guide to action. The author's opinion may not coincide with the opinion of CoinJoy.