What Is The Double Top Candlestick Pattern & How To Trade With It

Double Top Pattern

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:

Double Top pattern on a chart
Double Top pattern on a chart

To identify the pattern, traders should remember these points:

  1. Identify the two highs or peaks of similar width and height
  2. The distance between these peaks should not be too small
  3. 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.