Double top pattern

A double top forms when a rising price stalls at a level, pulls back, returns to the same level and fails again. On the chart it looks like the letter M: two highs with a low between them. The level of that middle low is called the neckline.

The story goes like this. At the first high, sellers show up and push price back. Buyers regroup and try again, but price is rejected in the same place a second time. A level that can't be crossed in two attempts tells you the selling waiting there outweighs the buying.

The pattern isn't complete at the second high. Two highs only sketch a candidate; the confirmation is a close below the neckline. Until that close, what you're looking at is a resistance being tested for the second time.

Compare the two highs first. Say gold tops at 2,418, pulls back to 2,396, then climbs to 2,416 and turns again. The highs are 2 points apart; they don't need to match exactly, only to sit in the same area. A second high that falls slightly short says more clearly that buyers are weakening.

Then look at the low between them. In the example the neckline is 2,396. The pattern is confirmed when price closes below that level with a body. A wick that dips under it isn't enough; price that sweeps beneath the neckline and snaps back may be telling you about a liquidity grab, not a double top.

Watch the time between the highs as well. Two highs three candles apart are usually ordinary chop. Two highs separated by a clear pullback, with at least a few dozen candles between them, carry more weight.

The classic target: measure the distance from the high to the neckline and project it down from the neckline. From 2,418 to 2,396 is 22 points, so the target after the break is around 2,374. The logical stop goes above the second high, because price returning there breaks the idea behind the pattern.

Mistaking the second high for a confirmed pattern. There are two ways to play the second high: enter on a rejection at resistance (upper wicks, closes pushed back down) with the stop just above the high, or wait for the neckline break. The first gives a better price and a shorter stop, but it rests only on a resistance rejection. The mistake is selling the moment price touches the area, before any rejection, or keeping a wide stop and trading it as if the double top were complete; buyers can clear the level on the third try.

Chasing the neckline break. The breakout candle is often long; selling at its low with the stop above the second high makes the distance huge. That's why some traders wait for price to return to the neckline from below and get rejected.

Treating every M shape as a reversal. Inside a strong uptrend, two highs are often a sideways pause before the next leg up. If the higher timeframe structure points up, a double top alone won't turn it.

If price slips under the neckline and then quickly closes back above it, the pattern has failed. With the stops of everyone who sold the break sitting above the second high, that failure can carry price back to the highs fast.

A double top that forms right before a big event such as a data release isn't reliable. When the number comes out, the market's direction can change within a few candles and the earlier highs lose their meaning.

Check the distance too. If strong support sits just below the neckline, the measured target gets hard to reach. A 25-point stop above the second high against a first obstacle 12 points below the break is under 1R even on paper.