Double top Forex pattern is one of the major reversal patterns that can be formed after a strong up trending market. This trading pattern is typically formed by two tops that are approximately similar in height with a neckline in between. A double top is confirmed when an uptrend reverses twice at approximately the same high price level. Often, the second top is not able to break the height of the first top, indicating that the buying pressure is just about finished. This is a strong sign of reversal. A double top pattern is not complete until the price breaks the neckline. Once the neckline is broken, there will be a drop. It may be a good idea to short just below the neckline. The longer the time, the more powerful the pattern is.
Double Top Formation
Double top pattern is described by two similar horizontal lines representing support and resistance levels. Respectively this pattern connects two most recent local highs of the price and a low, keeping a certain bunch of price fluctuations within. The price reverses twice at resistance levels under investor consideration the asset is overpriced there. This trading pattern is considered complete once price makes the second peak and then penetrates the lowest point between the highs, called the neckline. The sell signal from this pattern occurs when price breaks below the neckline. Generally in Forex trading the double tops pattern formation is used as an early warning sign that a bullish Forex trend to reverse. However, it is only established once the neckline is broken and price stays below the neckline. Neckline is just another name for the last support level formed on the Forex chart
Double Top Interpretation
Double top formation is considered to be completed and can be interpreted as change in direction of the trend downwards helping as a sell signal.
This chart pattern forms after an extended move upwards
This formation indicates that there will be a reversal in the market
We sell when price breaks below the neckline
Double Top Target price
Following double top pattern formation the price is generally believed to drop at least to its target level, calculated as follows:
T = S – H,
T – target level;
S – support level (recent local low);
H – pattern’s height (distance between support and resistance levels).