On 24 July 2018, the shares of Maruti Suzuki, India's largest passenger car manufacturer, rallied to trade just a few points below its all-time high. The stock had been in a strong uptrend for several months, reflecting widespread optimism among investors.
However, instead of breaking above this crucial level of all time high, it started to fall from that level. Aggressive sellers initiated a sharp decline in the stock that quickly broke the nearest support zone and evolved into a prolonged downtrend.
Looking back, the chart had already given a clue about the fading bullish momentum by forming one of the common bearish reversal patterns in technical analysis—the Double Top Chart Pattern. See the chart below.
Today we will learn about this reversal pattern in detail. Let's get staarted.
What is Double Top Chart Pattern?
How to identify a Double Top Chart Pattern?
As discussed earlier, a Double Top pattern resembles the letter 'M', making it one of the easiest chart patterns to recognise visually.
However, every 'M'-shaped formation is NOT a Double Top. Such patterns can appear anywhere on a chart, but for a valid Double Top, the pattern must be preceded by an uptrend. Patterns formed in the middle of the sideways trend and in the downtrend are not valid Double Tops.
The first peak of the Double Top pattern is formed as part of the ongoing bullish trend and is usually accompanied by moderate to high trading volume, reflecting strong buying interest.
The price then pulls back to form a trough often on diminishing volume, which is again in line with the ongoing uptrend. A horizontal line drawn from the low of the trough forms the neckline.
From the trough, buyers make one last attempt to push the price higher, forming the second peak that ends near the level of the first one. However, this rally is typically accompanied by lower volume. The peaks don’t need to be exactly at the same level, a difference of 3% is allowed.
Profit booking from this second peak drives the price lower. The pattern is confirmed once the price breaks below the neckline on strong volume.
It is important to remember that the mere formation of two similar peaks does not constitute a Double Top. Until the neckline is decisively broken, the pattern remains incomplete and should be treated only as a potential bearish reversal.
See the chart below. This is the same Maruti chart that you saw at the start of the post.
How to trade a Double Top Chart pattern?
Once you have identified a valid Double Top pattern, you have two ways to trade it.
The aggressive approach is to enter a short position—or exit an existing long position—as soon as the price breaks decisively below the neckline on strong volume. This enables you to capture the move early, however this approach carries a higher risk of failure as some Double Top patterns fail after the neckline break, with the price quickly recovering above the support level.
A more conservative approach is to wait for the price to retrace back to the neckline after the breakout. Since the neckline now acts as a new resistance, you can initiate a short position if the price is rejected from this level. This approach offers better confirmation and often provides a more favourable risk-to-reward ratio, the tradeoff though is sometimes retracement to the neckline doesn’t occur and price continues to fall reaching the target.
See the image below to understand the trading approach.
Once you have entered the trade, place stop-loss just above the neckline after a pullback entry or above the second peak (or the next significant resistance level) to allow for normal price fluctuations.
Estimate the profit target using the measured move technique, where the vertical distance between the peaks and the neckline is projected downward from the breakout point. While this provides a logical target, you should also consider nearby support levels that could halt the decline before the measured objective is achieved.
See the chart below to understand the entry, stop-loss and target points while trading the Double Top pattern.
Like any chart pattern, a Double Top becomes more reliable when multiple technical signals point in the same direction. One of the strongest confirmations is an RSI failure swing, where the first peak is accompanied by a RSI reading of above 70 and second peak is accompanied by RSI below 70, indicating fading bullish momentum. After the neckline breaks, the RSI often slips into the bearish zone, further reinforcing the shift in market sentiment.
Volume should also support the pattern: strong volume on the first peak, lower volume on the second peak, and a noticeable surge in volume during the neckline breakdown.
Another valuable confirmation is a trendline break before the neckline is breached. A break of the rising trendline suggests that the underlying uptrend has already weakened, making the subsequent neckline breakdown more likely to trigger a sustained bearish move.
Let' understand this with the help of a chart.
The four types of Double Tops-
Thomas Bulkowski divided double tops into four specific types based on the visual shape of their two peaks: Adam & Adam, Adam & Eve, Eve & Adam, and Eve & Eve.
An “Adam” peak looks like a sharp, thin, upside-down ‘V’, usually with a fast price jump. An “Eve” peak is broader, smoother, and takes more time to form. The image below displays four double-top patterns.
The Eve & Eve double top has the highest success rate when we look back at historical data. The Adam & Adam double top is the least likely to succeed, as shown by the data.
Summing it up-
The Double Top chart pattern has two peaks at almost the same level and is one of the most reliable bearish reversal chart patterns. A noticeable uptrend needs to happen before the appearance of two tops. This chart pattern is complete once the neckline is breached.
One shouldn’t solely rely on this chart pattern for trading decisions. When you integrate the pattern with volume, RSI, trend lines, support/resistance, and sound risk management, its effectiveness significantly improves. Traders can identify potential trend reversals sooner and make better trading decisions by accurately recognizing and trading the Double Top pattern.
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