In the chart, we can see that two peaks or “tops” were formed after a strong move up.
Notice how the second top was not able to break the high of the first top. This is a strong sign that a reversal is going to occur because it is telling us that the buying pressure is just about finished.
With the double top, we would place our entry order below the neckline because we are anticipating a reversal of the uptrend. So, In case the price breaches the neckline, traders may enter into a short position. In order to estimate the profit target, traders may take the height of the actual formation (the distance between the neckline and the highest of the two peaks) and place it down from the neckline.
A protective stop loss may be placed above the two peaks. If the pattern fails (prices continue to move above the second peak), losses will be limited.
Notice how the second top was not able to break the high of the first top. This is a strong sign that a reversal is going to occur because it is telling us that the buying pressure is just about finished.
With the double top, we would place our entry order below the neckline because we are anticipating a reversal of the uptrend. So, In case the price breaches the neckline, traders may enter into a short position. In order to estimate the profit target, traders may take the height of the actual formation (the distance between the neckline and the highest of the two peaks) and place it down from the neckline.
A protective stop loss may be placed above the two peaks. If the pattern fails (prices continue to move above the second peak), losses will be limited.
Comment:
Edited updates for the last paragraph : A protective stop loss may be placed above the neckline and this would depend on the level of risk the trader is willing to consume for his/her risk-rewards trade-off.