Highlights ①. Gate's "Basic Futures Contracts" course introduces various methods of technical analysis that are commonly employed in futures trading. The aim of these courses is to help traders establish a comprehensive framework for technical analysis. Covered topics include the basics of Candlestick charts, technical patterns, moving averages, trend lines, and the application of technical indicators. ②. This article, as Course X of the series "Master Technical Analysis", will introduce one key candlestick pattern-Double Tops, and will cover the concept of the pattern, its characteristics, technical meaning, as well as its application in trading.
1. What are double tops? Double tops feature two peaks that the price reaches during its fluctuations. Initially, the price undergoes a bullish run, culminating in the first peak with a surge in volume. After reaching this peak, both price and volume decline. After a short downturn, the price rises again, hitting the second peak, which is roughly at the same height as the first. During this ascent, while the volume also increases, it doesn't surpass the volume of the first peak. Subsequently, the price declines again, this time dropping below the previous low, solidifying the formation of the double tops pattern.
The pattern's name, "Double Tops", derives from its distinctive shape, marked by two peaks during its two bullish phases. Given its resemblance to the English letter "M", it is also referred to as the "M Top":
The pattern comprises another important component, called the "neckline", which acts as a dividing line between the sell and buy markets.
2. Double Top Features ①. Appears in an upward trend; ②. The two peaks are of the same height, or the right one is slightly lower than the left; ③. The trading volume reached by the right top is generally smaller than that on the left peak; ④. In most cases, the neckline goes horizontally passing through the first trough of the pattern. Sometimes it also comes as a line that titles slightly.
3. Technical meaning of Double Tops Double Tops is a reliable reversal signal, indicating the market trend is about to change, and it is the time to sell your assets.
4. Use of Double Tops Double Tops suggest that the price may have reached its zenith, signaling a potential shift towards a bearish market. Once this pattern is confirmed, three crucial selling opportunities emerge that can be leveraged to maximize gains. Below, we outline the positions of these three selling points.
①. After the double tops are formed, the first selling opportunity occurs when the price falls below the neckline, closed with a red candlestick that day. Here is where the first selling opportunity is :
②. After the neckline is breached, the price declines for some time before experiencing a rally. However, it soon reverses course, descending once more before reaching the neckline. This reversal point presents the second selling opportunity. Below, we illustrate the location of this second selling chance:
③. Once the price drops below the neckline, it descends, rebounds, and then falls once more before approaching the neckline again. If this decline persists and drives the price below the previous low, this moment presents the third selling opportunity. Below, we pinpoint the location of this third selling chance:
Let's summarize the three selling opportunities as illustrated in the figure below:
A. First selling opportunity: When the price drops below the neckline.
B. Second selling opportunity: After breaching the neckline, the price initially descends, rebounds, but falls again before reaching the neckline.
C. Third selling opportunity: Following a drop below the neckline, the price first declines, then rises, but descends again without touching the neckline. Subsequently, it continues its decline below the neckline.
The longer it takes for the Double Top to form, the greater the likelihood of a reversal, and the more extended the potential bearish market may persist.
To forecast the depth of the market's decline: Start by drawing a vertical line from the neckline up to the peak's height. Subtract the height of this vertical line from the neckline value to determine the minimum extent of the market's drop. The following illustration details this measurement process:
Not all Double Tops can be relied upon as valid reversal signals. For example, after the formation of the pattern, if the peak gets below the neckline but then rises to trespass it again, with a green candlestick formed that day, it is possible for the reversal to fail. In such a case, traders should avoid making rushed decisions and should wait for clearer signals to act. Below is an example of an invalid double top:
5. Case Study
Below is a use case of double tops in the BTC market:
The image above depicts the daily candlestick chart for BTC futures on Gate. Observably, after a robust three-month bullish surge beginning on July 21, BTC escalated from US$29,000 to approximately US$66,000, reflecting an increase of over 120%. This surge was followed by a consolidation phase before the price climbed once more. During this second bullish rise, the price peaked at a new high of $69,000. Thereafter, it began to experience fluctuations, consistently registering highs that were below the $69,000 mark. When the price dipped below the $58,000 neckline, the double tops pattern was confirmed, ushering the market into a year-long bearish trend.
Summary Beyond double tops, prices occasionally undergo several cycles of fluctuations, leading to the formation of triple tops or even multiple tops. These patterns are also perceived as reversal indicators. Once a pattern is established and the neckline's position determined, pivotal selling signals can be discerned by juxtaposing the price's positions with that of the neckline.
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Disclaimer This article is for informational purposes only and does not constitute investment advice. Gate is not responsible for any investment decisions you make. Content related to technical analysis, market assessments, trading skills, and traders' insights should not be considered a basis for investment. Investing carries potential risks and uncertainties. This article offers no guarantees or assurances of returns on any type of investment.
