Double Top: Definition, Patterns, and Use in Trading

Double tops and double bottoms are chart patterns used to signify a reversal from the prevailing trend. Double top and double bottom formations are highly effective when identified correctly. However, they can be extremely detrimental when they are interpreted incorrectly. As the introduction mentions, a double top pattern is a bullish reversal pattern. This means that it happens when an asset increases in value; if the pattern is formed, it forecasts a drop in the double top pattern rules asset’s value.

Forex trading strategies for double tops and bottoms

If using a profit target, some traders may use the height of the pattern, from the low to the swing high, and add this to the breakout point. For example, if the low is $3,160 and the high is $4,235, the pattern height is $1,075. Added to the breakout point (swing high), the profit target is $5,310. U.S. Government Required Disclaimer – Commodity Futures Trading Commission. Futures and options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets.

1. The distance from the double top resistance level to the neckline, in this case, is 270 pips.
2. The pattern comprises five parts including a top 1, top 2, bottom, a neckline and a breakout point.
3. Additionally, a trough is formed between the two peaks as a short downward correction.
4. The double top pattern differences with a double bottom pattern are its shape with the double top shaped like the letter “M” whereas a double bottom is shaped like the letter “W”.

Higher timeframe weekly timeframe and above charts are more reliable to intradray timeframe double bottoms. For example, if the long entry price of this pattern is $50 and the pattern trough support level is $40, the price target is $60 ($50+$10). The double top pattern entry point is set when the price reaches above the pattern resistance line on rising buyer volume (green bars). The double bottom pattern drawing involves identifying two equal support points and plotting the number 1 and 2 below these two points.

What Is The Risk Management Of a Double Top?

Favored by traders looking to lock in profits or open new short positions, the double top is one of the most popular chart patterns. The double top pattern works best when the right peak barely breaks the left peak causing bullish traders to get trapped into the bull trend. While prices reverse and trend lower from the second peak, those bullish traders are caught long and therefore need to sell to minimize their losses. The sellers overwhelm the buyers and pricing keeps readjusting lower to confirm the pattern. The fifth double top pattern trading step is to conduct post-trade analysis.

A stop-loss level is typically calculated using the risk/reward ratio. The ratio is determined by considering the current market conditions, but most traders believe that it should be at least a third of the take-profit target. Additionally, the common rules state that it should always be placed above the neckline. There are several options that traders can consider before entering the market. They can sell just after the breakout occurs; this is at the double top’s breakout candlestick, so usually, they wait for the candle to close.

If the gap between the peaks is too small, then the pattern may not indicate a longer-term change in asset price. Candlestick charts are commonly used because they show the high and low for each price bar or candle. Until the price falls below the swing low between the peaks, the double top pattern is still forming and this does not necessarily indicate a trend reversal. Below is an example of a double top on a Brent Crude oil price chart. 4 – If that second peak forms and prices fail to cross the resistance level, verify that prices break through the neckline support level, thus validating that you indeed have a double top pattern.

Others may place it above a more recent swing high or use a trailing stop-loss. Consider using one of the best trading simulators to teach yourself to trade double top patterns without risk. Double top patterns are not a sure thing, and their presence alone is insufficient to provide traders with a significant statistical advantage. However, if WTI reverses higher, the trade is still profitable because profit levels were set at support levels where the price could reverse.

The double top pattern and its bearish signal would be invalidated if prices were to cross the resistance level represented by the height of the double top pattern’s two peaks. Double top and bottom patterns are chart patterns that occur when the underlying investment moves in a similar pattern to the letter “W” (double bottom) or “M” (double top). Double top and bottom analysis is used in technical analysis to explain movements in a security or other investment, and can be used as part of a trading strategy to exploit recurring patterns. 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.

What Type Of Traders Have The Most Success With Trading Double Tops?

After creating the second top on the chart, GOOG decreases through the red signal line. This breakout gives us a confirmation signal of the pattern and a great short opportunity. Now that you are familiar with the double top chart definition and the double bottom formation, I will now show you how to trade them successfully. The image displays another double top pattern example, where we measure the size of the figure and its minimum target. During the second higher peak, your trade will close if you set your stop loss at the neckline – which is the best-case scenario.

The price breaks the neckline and moves further down confirming the upcoming bearish trend. A double-top pattern usually forms towards the end of a strong uptrend and foreshadows an extremely bearish market. Rounding tops can often be an indicator for a bearish reversal as they often occur after an extended bullish rally. If a double top occurs, the second rounded top will usually be slightly below the first rounded tops peak indicating resistance and exhaustion.

1. It’s crucial to remember that chart patterns, like the double top pattern, don’t always accurately forecast future price alterations.
2. In line with chart pattern principles, when prices drop below the neckline support level in a double top pattern, this is a harbinger of a potential price decline.
3. This breakout above the resistance level suggests that the bullish trend may still be in play, and the anticipated bearish reversal may not occur.
4. 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.
5. The market then pulled back to support and subsequently retested the same resistance level (second top).

A double top is a popular technical analysis pattern that usually appears before a reversal in an uptrend. It’s one of the most common patterns and it can be found on any timeframe of any asset. In this FXOpen article, we will explore how to spot the double top formation on a price chart and use it to build your own trading strategy. The double top chart pattern is one of the key top reversal patterns.

Yes, the double top pattern is a good signal for selling the security rather than buying it, as it marks the end of the bullish trend and the beginning of a bearish trend. Traders usually opt for trading techniques such as shorting to make the best of the trend reversal. Traders prefer to use the double-top pattern primarily owing to the advantages that it includes. The two main advantages of using the double-top pattern include its ability to be used in different financial markets and its ability to be used in all time frames.

Understanding Double Tops and Bottoms

They are direct opposites, in that a double top looks like an ‘M’ and indicates a bearish trend reversal, while a double bottom looks like a ‘W’ and indicates a bullish trend reversal. To identify a double top pattern, look for market securities in rising bullish trends but showing signs of bullish price exhaustion with price retracements. After the first swing high resistance price is marked, wait for a price retest of the resistance level and observe the price action. If the price fails at the same resistance area, the second swing high peak of the pattern is observed. Watch as price drops from this resistance point to the support level.

This means for every 100 trades, a trader wins 34 trades making 2.8 units (95.2 units total) and loses 66 trades losing 1 unit (66 units total). Therefore, over 100 trades, a trader should hypothetically net 29.2 units (95.2 units – 66 units). Be aware that past performance is not indicative of future trading results. A double bottom pattern target is set by calculating the height between the horizontal resistance trendline and the swing low trough level and adding this number to the buy entry point.