What Does It Mean When Someone Says "Double Top"?

A double top is a very bad technical reversal pattern that happens when an asset's price goes up twice in a row with only a small drop in price between the two highs. 

Double peaks happen often in the financial markets. It is confirmed when the price of the asset falls below a level of support that is equal to the lowest point between the two previous highs.

What Does It Mean to Have a Double Top?

A double top could mean that the medium- to long-term trend of an asset class is changing. The double top pattern that formed in Amazon.com, Inc. (AMZN) stock between September and October 2018 at a price of $2,050 is shown on the chart above. In this situation, the amount of support that grew to around $1,880 was a lot. Even though the stock fell about 8% from its peak in October to the support level at $1,880, the double top could not be proven until the stock fell below $1,880. After that, the share price kept going down until it was over 31% less than it was before.

In the next example, we'll use Netflix Inc. (NFLX). In March and April of 2018, what looks like the building of a double top can be seen. Since the stock price goes up with an uptrend, on the other hand, we can see that support is not broken and is not even tested. If you scroll down the chart, however, you can see that the stock seems to make what looks like a double top in June and July. As shown by the price falling below the support level of $380, which led to a 39% drop to $231 in December, this time the pattern does turn out to be a reversal pattern. Also, pay attention to how the support level at $380 stopped the stock from going up twice in the month of November.

Double Top vs. Not Succeeding Double-Piece

In reality, there is a big difference between a double top and an attempt that didn't work. A real double top is a very bad technical pattern that can lead to a big drop in the price of a stock or other asset. 

This kind of change could be really bad. But you have to be patient and find the critical support level to figure out if there is a double top or not. If you only look for two consecutive peaks to spot a double top, you might get a wrong reading, which could cause you to get out of a trade too soon.

Double Tops Limitations

Like all other chart patterns, double top and double bottom patterns often fail. The wrong break in the neckline is the most important thing. Price tends to break through the neckline, only to turn back and keep going in the same direction as the previous trend. Many traders jump into a trade as soon as prices break through a neckline instead of waiting for prices to go back and retest the neckline.

The tops and bottoms of the patterns are not the same and don't have set shapes. They change slightly depending on how volatile the market is, how fast prices are moving, and when the pattern happens. Many traders may misidentify or not identify at all.

Even before the pattern is finished, many traders enter the pattern at the midpoint, which is halfway between the neckline and the highest top point.

The patterns don't give a take profit point; instead, it is calculated using other technical or risk management methods.