subject: Double Top Model And Its Technical Specifications [print this page] 1. Prior Trend: Like other reversal patterns, there must be a trend present to reverse.
2. Basic Peak: The first new high should mark the top of the latest trend. This peak is generally acceptable and normal in an uptrend. There is no concern about position at this moment in time.
3. Trough: Following the first new high (top 1), an abjuration in price occurs and its range is more or less 10-20%. Due to the decline from the first high the volume is generally regarded as insignificant.
4. Second Peak: To assure a convincing double top has formed, it is the key that volume declines briskly as the share charge attempts to retest the late new high (top 1). It should be anticipated that resistance will be met upon the retest. This pattern still needs confirmation at this stage.
5. Decline from the High: The following decline from the second high will observe an increase in volume and a possible associated accelerated fall. The share price could possibly gap lower. The strong fall represents the supply outweighing the demand and retractions to support levels are looming as a real possibility.
6. Support Break: the double top pattern is only complete when a break of the reaction low has transpired. The share cost is able to trade down to it's sustain level, the pattern of double top and more critically trend reversal is not fulfilled. To complete the double top you must have a break in support below the lowest point between the two peaks. The following decline from the second high will observe an increase in volume and a possible associated accelerated fall.
7. Support turned into Resistance: Pullback breakouts usually have 2-3% declines before attempting to retest the breakout point. If for any cause the share price closes above the breakout level it will become a latest support level, hence the pattern becomes invalid. If the support levels are broken there becomes a chance of impending resistance with a possible test of this newly found resistance level amid a small bounce in share price, commonly known as a reaction rally. At this point, it gives the trader a chance to close a losing position or take an opportunistic approach and trade this market to the short side.
8. Price Target: broadly, a good indication is the following calculation - by measuring the distance among the support break level to the peak and then subtracting it from the sustain break. This will give you the approximate price target. Predictably this gives the trader an understanding, the larger the structure the greater the potential for an expensive decline in price. Anticipated swing trades are executed at breakpoints through to reaction lows, although it is more common to let the share price fall lower than the reaction low. It is probable to achieve a rally back up to the reaction low. This is the about appropriate time to start to trade the share short. You will require placing a stop order precisely above the reaction low. It is acceptable to sell into the market to the first top; you will need to place the stop loss just above that top.
