Double Top: Reversal Pattern on the Chart
Comprehensive Analysis of the Double Top Pattern
Basics and Mechanics of the Double Top Pattern
Formation and Characteristics
A double top consists of two approximately equal peaks in height, separated by a local trough. The classic structure includes four key stages:
First Peak
The upward trend pushes the price to a new high, after which a downward correction begins.
Local Bottom
The price pulls back to a support level, forming a "trough" — known as the "neckline" of the pattern.
Second Peak
The price rises again, but as it approaches the level of the first peak, it slows down and reverses downward, forming a second peak at a lower volume, indicating weakening buyer demand.
Neckline Break
The horizontal support level drawn through the minimum between the peaks is called the "neckline" of the pattern. A break below this level with an increase in volume signals the end of the upward trend and the beginning of a bearish phase.
Visual Identification and Drawing the Neckline
Horizontal Neckline
The neckline is drawn through the local minimum between the peaks. A horizontal line at the closing level of candles (daily or hourly) best reflects the actual price hold.
Sloped Neckline
When the minima are not at the same level, a slightly sloped line is used. This technique helps to identify the breakout moment more accurately, but caution is needed so as not to mistake a false breakout for a reversal.
Target Calculation for Downside
The target after the breakout is calculated as the difference between the peak level and the neckline. For example, with peaks at 150 ₽ and a neckline at 130 ₽, the target is around 110 ₽ (130−20).
Confirmation of the Pattern with Indicators and Volume
Volume Analysis
Upon the neckline breakout, volume should exceed the average over the last 20 periods, indicating active seller participation.
RSI and MACD
RSI Divergence: if the second peak forms at a lower RSI value, this signals weakening buyer momentum. MACD: a decline in the histogram below zero and crossing the signal line from above strengthens the reversal signal.
Multi-Timeframe Approach
Validating the formation of the pattern on daily and hourly (or 15-minute) charts reduces the risk of false breakouts and confirms the strength of the signal.
Trading Strategies and Risk Management
Entering a Short Position
The primary signal is a candle closing below the neckline with volume above average. An aggressive option is to enter on a retest of the neckline after breakout if volume remains low on the bounce.
Stop-Loss and Take-Profit
A stop-loss is set slightly above the second peak (+3–5 ₽/points). Take-profit is calculated based on the height of the pattern: take part of the position at 50% of this target and leave the remainder until the full target is reached.
Trailing Stop and Averaging
The trailing stop is moved following the neckline or each new local maximum. Averaging is only justified during strong continuation of bearish momentum.
Psychology and Filtering False Breakouts
The Psychology of Peak Formation
After the first peak, buyers remain active, but their strength diminishes. The second peak often becomes a trap for optimists, while sellers accumulate positions.
False Breakouts
A false breakout occurs when the price falls below the neckline but with volume below average. To filter it, require volume >120% of the average, a close of the second candle below the neckline, and confirmation from indicators.
Discipline and Trade Journal
Keeping a journal that records the reasons for entry/exit, levels, and outcomes helps identify weaknesses in the strategy and improve its effectiveness.
Practical Cases
Yandex Shares, Spring 2024
Two peaks at 3500 ₽ and 3480 ₽ with a neckline at 3300 ₽. The breakout of the neckline with volume +150% of the average led to a decline to 3100 ₽, yielding over 6% profit in just a few days.
WTI Oil Futures, Summer 2023
The double top pattern at the level of 80 USD and neckline 75 USD. The breakout was accompanied by a sharp volume spike, after which the price dropped to 70 USD.
RTS Index, Autumn 2022
Highs at 105,000 p. and 104,500 p. with a neckline at 100,000 p. The short signal resulted in a drop to 92,000 p. in two weeks.
Conclusion
The "double top" pattern, when correctly identified and confirmed with volume and indicators, serves as a reliable signal for the reversal of an upward trend. The combination of technical analysis, strict risk management, and psychological discipline makes this pattern a powerful tool in a trader's arsenal.
