The Double Top is a bearish reversal pattern that appears after the price reaches a high two times, and there is a decline between them.
What is the Double Top pattern?
The Double Top is a standard pattern with two highs and one low to form a reversal pattern. The central part of the pattern is the dropping of the price between two highs.
The two highs are known as tops and show a resistance line. In comparison, the decline in price shows a support level. After the second top, the price rally downwards, and this creates a neckline between the first bottom and second bottom.
Here is what the pattern looks like on a chart:
To identify the pattern, traders should remember these points:
- Identify the two highs or peaks of similar width and height
- The distance between these peaks should not be too small
- There should be a neckline at the support level.
The neckline can be drawn between the first bottom and the second bottom. This neckline confirms the Double Top pattern.
The opposite of the Double Top is the Double bottom pattern. The pattern appears in a downtrend and signals a bullish reversal.
How to use the Double Top pattern?
The Double Top pattern is usually used in the forex market. As mentioned earlier, the pattern takes place after the formation of two tops and two bottoms.
As the pattern is bearish, traders may look to take sell positions after plotting of the neckline. This neckline can act as an entry point for going short. The resistance level joining the two tops can act as a stop-loss, and the neckline at the support level can act as a profit-target.
Some traders may wish to use the pattern in conjunction with the momentum oscillator so that they can find overbought/oversold conditions and divergences.
Let’s say a trader identifies the Double Top pattern, but rather than forming a second bottom, and the price continues in the upward direction. And the trader taking sell positions would lose. Therefore, traders can apply indicators like RSI or Stochastics to first confirm the trend’s direction and then look to trade the pattern.
Traders can also take buy positions with the Double Top, but it is first important to correctly identify the pattern. There is a sharp decline when the first top appears, but the price hurries its way up after the first bottom. This is the time when traders could look to enter buy positons and leave after the formation of the second top.
Double Top pattern trading strategy
The Double Top pattern can occur in both shorter and longer timeframes. However, many experts conclude that it’s best to trade the pattern on longer timeframes, as the time required to form the first bottom would ideally not be too small.
Double Top pattern buy strategy
- Locate the pattern in an uptrend.
- Wait for the price bar to go bullish before entering.
- Enter the trade after the formation of the first bottom.
- Place a stop-loss near the recent low from the entry point.
- Exit the trade when the second peak appears.
Double Top pattern sell strategy
- Locate the pattern in an uptrend.
- Wait for the price bar to go bearish before entering.
- Enter the trade after the formation of the second bottom.
- There has to be a neckline at the two bottoms.
- Place a stop-loss at or near the peaks.
- Exit the trade on low.
Double Top pattern conclusion
The Double Top Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. The Double Top pattern requires a complete understanding of the trading patterns. Although hard to identify, it can give possible entry and exit points into the market.
I would prefer to use the majority of candlestick patterns such as the Double Top Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
The Double Top Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Double Top Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Double Top Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.