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. A double top is formed after there is an extended move up. The “tops” are peaks that are formed when the price hits a certain level that can’t be broken. After hitting this level, the price will bounce off it slightly, but then return back to test the level again.
What is the Double Top pattern?
The double top is one of the most popular technical analysis patterns used by forex traders. However, it’s applicable to all types of markets to indicate an uptrend. It emerges in the form of two consecutive peaks at the end of a bullish trend, roughly recognizable as an M-shape.
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.
As the double top is formed at the end of an uptrend, the prior trend should be an uptrend. Traders should spot if two rounding tops are forming and also note the size of the tops. Traders may only look to enter the short position when the price break out from the support level or the neckline.
For the double top pattern to be confirmed, the trend must retrace more significantly than it did after the initial retracement following the first peak. Often, this means that the price momentum breaks through the neckline level of support, and the bearish trend continues for a medium or long period of time.
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 is a type of chart pattern that is an indication that the prevailing trend may reverse, in the short or long term. The double top is a common occurrence towards the end of a bullish market. The price formation looks like two peaks that occur after one another
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.
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