How to Trade the Double Top - Reversal Chart Pattern
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The Double Top pattern is one that often occurs, and you can see it whether you are using a simple line chart or a candlestick chart. It is when the price is in an uptrend, reaches a high level and drops back down, then reaches up to the same level and falls back again, starting a downtrend.
Because this will often happen with this type of price movement, traders gave it the name of the Double Top and will look for it, as it often turns out to be a reversal pattern, ending an uptrend and beginning a downtrend.
You can see the Double Top pattern occurring in all types of chart, from intraday charts which plot minutes or hours, right up to charts which cover years and years of trading. It is interesting to think why it should be that a price movement like this could indicate the likelihood of a trend reversal.
As we will discuss later, sometimes particular prices seemed to represent a psychological barrier to the majority of traders. This can occur when the price going up or down. When the price gets to a certain level, it seems to be rebuffed and unable to pass through. This is to do with the perceived value of the shares that you are looking at.
In the case of the Double Top, this level, which is called a resistance, is a price level that traders in general do not want to pay more than. When the price goes up to the level, then the buying interest reduces to the point that the price does not increase any further.
In an uptrend, you will frequently see a price goes up to level then falls back a little before going up even higher. This is just part of the normal fluctuations of a price under the dictates of supply and demand. The Double Top is different because the next time the price comes up to the level it does not go any higher.
This is a strong indication to the technical analyst that the market simply does not believe the price should be higher at the moment. At sometime in the future, the price may go higher, but the common wisdom is that the price is high enough and buyers are not sufficiently interested to push it any higher.
This may be the start of a general loss in buying interest for the shares. Price is dependent on supply and demand, and if buying interest is waning then it is almost inevitable that the price will fall lower. This is exactly what the Double Top shows in pictorial form. It is as if the price is hitting a ceiling, and therefore cannot go any higher.
As you learn about technical analysis, you will find out more information about the characteristics of price resistance, how you can spot it and what makes it operate as it does.
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