The double top (also known as an M formation) is a reversal formation in the price chart of securities. The chart pattern follows an upward trend and reverses it into a downward trend, whereby two highs are formed at a similar level. In the article we explain how you can recognize the formation yourself and identify trading ideas from it.
The most important in a nutshell
- The double top turns an upward trend into a downward trend.
- If the height of the formation is measured, a technical target for a take profit can be determined.
- Due to its appearance, the formation is often referred to as the „M formation“ and is easily recognizable.
Double top formation: Structure
The double-top formation consists of two progression highs, which are at a similar price level. There is an intermediate low between the two highs, which is important for the signal of the chart pattern. The basic idea of the pattern as a trend change formation is based on the fact that the two highs indicate that the market is reaching a resistance level that will not be exceeded. True to the motto "What can no longer rise can fall", there is often a sell-off in the price.
Good to know: There is also a variation of the double top pattern with three highs at a similar level. This formation is known as a triplet top.
Entry, stop-loss & take-profit
If the price of a security falls below the intermediate low, the formation is considered complete - a short signal is generated. In the literature, the level of the intermediate low is often referred to as the "neckline" or "signal line".
In day trading, you can understand the formation as an indication of falling prices, whereby a technical target price can be determined. To do this, the height of the formation should be measured and placed at the breakout level. For short traders, it is worth placing a take profit order here.
Tip from the field: Trading is risky, and the stop loss is an excellent tool for capital protection. I recommend that you always place a stop loss.
Is the double top good?
Due to its simple structure, the double top formation is easy to recognize and a good formation to practice, especially for beginners in technical analysis.
From practical experience, I can tell you that it is important to wait for the formation to break out first! From the moment of the breakout, the double top has a high significance and effect on the chart.
As long as the formation has not broken below the interim low, there is a risk that the price will simply continue the previous upward trend. In this case, the double top is regarded as a consolidation.
Conclusion: Simple formation for trading beginners
The double top formation can be found in all time frames and assets, which is why knowledge of the pattern is important for every investor. Due to its simple structure and application, the chart formation offers a good first point of reference for budding technical analysts.
The chart pattern is considered a classic reversal pattern, whereby an upward trend is led into a downward trend. However, it is important to note that the double top is not the strongest reversal pattern!
In practice, I would never make a trading decision based on this formation alone. By combining it with an indicator such as the Relative Strength Index (RSI) or other tools, the double top can at least contribute to a decision.