How to Trade the Double Top Pattern

To be sure of the correctness of the signal, it is necessary to ensure that all the required conditions for the formation of a double top are met. It is also essential to confirm the chart pattern with other aspects of technical analysis. The more confirming factors there are, the more reliable the trading signal will be. A double top is generally considered a reversal pattern when it appears on bar or line charts because it signals that the market will soon reverse its prevailing direction or trend. A double-top candlestick pattern also provides a strong bearish market reversal signal when it appears on candlestick charts. As with any other chart patterns used in technical analysis, a double top pattern is not guaranteed to succeed and is always up for individual interpretation.

This is the Double Top and its reversed equivalent the Double Bottom. We will discuss the structure of these two patterns and the potential they create on the chart. Finally, we will show you how to trade the Double Top and Bottom reversal formations using practical examples. Chart patterns are an integral part of the technical trader’s arsenal. One reason why many traders find chart trading attractive is because these patterns can offer precise entry and exit points based on the rules of each pattern.

Stay on top of upcoming market-moving events with our customisable economic calendar. Double top and bottom formations are highly effective when identified correctly. However, they can be extremely detrimental when they are interpreted incorrectly. Therefore, one must be extremely careful and patient before jumping to conclusions.

Step 7: Neckline Breakout

The slowing momentum may be evidenced through a lagging peak on an oscillator like RSI. Though not required, the market may break above the first peak, even if briefly. A slight and temporary break above the first peak is preferred as it may excite the bulls only to reverse and trend lower.

A bearish candle with a very big upper candlewick is created and it nearly hits our stop. However, our stop loss order is well positioned and it sustains the pressure. As mentioned, this is pretty much the same situation as the Double Top, but this time the price action starts with a bearish trend, which gets reversed into a fresh bullish move. This presentation discusses technical analysis, other approaches, including fundamental analysis, may offer very different views. The examples provided are for illustrative purposes only and are not intended to be reflective of the results you can expect to achieve.

Stock market volatility (movement) is much less frenetic as displayed by the ‘smoother’ chart construction. The use of an oscillator has been implemented in this stock example to show the diversity of supporting functions that can be used with the double top pattern. The double bottom is also a trend reversal formation, but this time we are looking to go long instead of short. If you draw a trendline between the two retracement lows on a triple top pattern, when the price drops below that trendline it can also be used as an entry point. This is only useful if the second retracement is a bit higher than the first.

What Is the Successful Rate of a Double Top Pattern?

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In conclusion, the double top pattern is a bearish reversal pattern that signals a shift in market sentiment from bullish to bearish. Traders can use this pattern to make profitable trades by identifying the pattern, confirming it, entering the trade, and managing the trade. However, traders should also be aware of the risks involved in trading and use proper risk management techniques to minimize losses. A double top is a frequently occurring chart pattern that signals a bearish trend reversal, usually at the end of an uptrend. Much like the double bottom pattern, this pattern is commonly used in technical analysis by forex traders and analysts and is considered a reliable and easy-to-identify chart pattern. Double bottom patterns are essentially the opposite of double top patterns.

Double and Triple Tops – Final Word

In other words, your minimum target equals the size of the pattern. The first thing you need to do when you spot the pattern is to manually add the Neck Line on the chart. A measured move objective can be used to find a potential https://g-markets.net/ profit target. The double top is a reversal pattern which typically occurs after an extended move up. In this scenario, we would have waited for the market to break the neckline and then retest the level as new resistance.

The break of the neckline, a horizontal line formed between the lows of the troughs, is frequently used by traders to confirm the pattern. It is considered a signal to start short positions or sell when the price crosses below the neckline, with the expectation that the price will continue to decrease. The double top pattern is formed after a prior uptrend with the first peak reaching a resistance high in conjunction with an overbought signal highlighted by the RSI oscillator.

Enter a position before the price drops below the minimum

Basing a double top solely on the formation of two consecutive peaks could lead to a false reading and cause an early exit from a position. It’s crucial to remember that chart patterns, like the double top pattern, don’t always accurately forecast future price alterations. They can produce false signals or unsuccessful patterns, but they are useful for spotting possible trends and reversals. In the next example using Netflix Inc. (NFLX), we can see what appears to be the formation of a double top.

• Since then we have continuously created the new and improved the old, so that your trading on the platform is seamless and lucrative.
• The double top and double bottom can be a simple pattern to identify, but incredibly powerful when traded correctly.
• Profitability is not assured, and there are a number of variables that may affect the result.
• Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.
• You should measure the size of the pattern as discussed earlier and then apply it downwards starting from the Neck Line.

M pattern is the second name of the double top pattern because this chart pattern resembles the shape of the alphabet “M”. The Stop-loss level is always above the highest high of the double top pattern. Before trading double top forex or choosing a chart pattern to trade on a live account, you must understand the logic of pattern formation. If the price action closes a candle below the Neck Line, we confirm the validity of the formation.

Double Bottom Pattern

In many instances the two tops are on the same level, and sometimes the second top could even be slightly higher than the first top. If the second top is higher than the first top, you will typically see a divergence pattern forming as well. This time we have added a second arrow which is equivalent to the first arrow. So, the first arrow measures the size of the pattern and the second arrow applies this size as a minimum target of the pattern. After you measure the size of the pattern, you need to apply this distance starting from the opposite side of the neck line.

Also, notice how the support level at $380 acted as resistance on two occasions in November when the stock was rising. Double and triple tops also give an indication of how far the price could drop once the pattern completes. Take the height of the pattern (high peak minus low retracement) and subtract that height from the breakout point (completion point) of the pattern. For example, if a double top peaks out at $50, and retraces to $48, the pattern is $2 high.

Key Elements of a Double Top

Other technical indicators can also be used to confirm the pattern, such as moving averages or oscillators. The double top pattern is incomplete until a valid neckline breakout happens. Because the trend will remain bullish and the price has the ability to break the resistance zone until a valid neckline or support zone breakout. When the support zone breaks, then it means buyers have lost the momentum and sellers are on hold now.

However, the price may continue to rise, creating a second peak that fails to break through the same resistance level. This failure to break above the resistance level signals a shift in market sentiment, and traders start selling, causing the price to drop. Technical chart patterns called double tops often point to the possibility of a downtrend reversal from an uptrend. It develops when the price of an asset twice reaches a resistance level, fails to break through it, and then starts to fall. A good entry point for traders to start short positions is the break of the neckline in a double top formation.