Trading Stock Charts Double Top

Online Stock Trading - Stock Charts for Beginners - Trading Double Tops and Double Bottoms

Technical analysis is a very useful and in fact essential tool if you want to trade stocks online  and any beginners trying to make money investing would be well advised to have at least a basic graps of stock charts. Stock charts and charting software packages are used extensively whether trading stocks and shares, commodities, currencies, futures or options. The main reason this should be so and that it is important for beginners to stock investing to understand is that the charts are not just a random set of numbers in graphic form, they are a reflection of human behavior over time and also, given that so many professionals use them, they actually become self-fulfilling prophecies. So you ignore chart patterns and trading signals at your peril.

One pattern that is very widely followed is the double top after an uptrend (or the double bottom after a downtrend).

A double top is formed when buyers force a stock or index price up to a certain level then the sellers take over and force the price down again. After this the buyers take control again and force the price back up to the previous level, but are unable to force it through that price (one reason being that many people are expecting a double top to be formed and so are getting ready to sell). Sellers then regain control and force the price back down. Buyers are then reluctant to try and force the price back up and so the price continues to fall.

Take a look at this mother of all double tops which was formed on the S&P500 - a 30 year chart

Back in 2000 the S&P peaked at around 1530 in 2007 it peaked at around 1575. The low point between the two was around 780 in 2002. This gives a difference between the peak and the trough of around 800 points.

Double tops (and double bottoms) are considered to be reversal patterns, indicating that the trend may be coming to an end.

To trade a double top (or double bottom) it is important to understand that the low price between the two peaks is seen as a support level. If this support level is broken then traders will sell - as breaking this support level is seen as confirmation that the uptrend is over.

What is equally important is that the distance from the bottom between the two peaks back to the top of the peaks is considered to be the potential for profit on the downside once the support has been broken i.e. if the distance is 500 then the fall could be 500 below the support level. In the case of the S&P above the difference is around 800 and the low point of the trough was around 780 so theoretically the S&P could fall back to zero ! Highly unlikely but many people are still predicting that the S&P could fall well below the 666 it hit back in March 2009.

Volume is also considered to be important. Volume on the second peak should be lower than the volume on the first peak (this ties in with the theory that some people are selling in expectation of the double top being formed). There should also be an increase in volume when the support is broken.
So if you are new to stock trading and consider yourself a beginner then do yourself a favor and learn how to read charts the double top is one of the most basic patterns but one that beginners to stock charts need to learn to recognize.

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