Double Top: Definition, Patterns, and Use in Trading

Unlike trading a double top, where traders take a short position, after a double bottom, traders would typically take long positions that will profit from the rising price. It is formed when the price of an asset reaches a peak two consecutive times with a moderate decline between the two. It is confirmed once the price falls below a support level equivalent to the low between the two previous peaks. Traders can also take buy positions with the Double Top, but it is first important to correctly identify the pattern.

The four standard deviations cover more than 99% of all probabilities and therefore seem to offer a reasonable cut-off point. More importantly they work well in actual testing, providing stops that are not too tight, yet not so wide as to become prohibitively costly. Those who have a fader mentality—who love to fight the tape, sell into strength and buy weakness—will try to anticipate the pattern by stepping in front of the price move.

It’s possible that not all double-top patterns have exact symmetry or the same peaks and troughs. The pricing ranges, length of time, and shape of the design are all flexible. It can be difficult to precisely specify the entry and departure locations or establish the pattern’s target levels because of this variability. Even the strongest pattern may break in the opposite direction of its normal path. At first glance four standard deviations may seem like an extreme choice. After all, two standard deviations cover 95% of possible scenarios in a normal distribution of a dataset.

Is a Double-Top Pattern Bullish?

Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. The pattern on the chart is bearish and points to a possible trend change from an uptrend to a downtrend. The double bottom is also a trend reversal formation, but this time we are looking to go long instead of short.

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. At this point, if the momentum had continued lower, the pattern would have been void. This continued only for a short while before the asset once again lost its momentum. This time, the retracement broke through the neckline which signified a more permanent reversal in the overall momentum of the asset’s value. As a result, you can use CFDs and spread bets during both a double top and a double bottom pattern.

How to trade on double tops and double bottoms

It is made up of two lows below a resistance level which – as with the double top pattern – is referred to as the neckline. The first low will come immediately after the bearish trend, but it will stop and move in a bullish retracement to the neckline, which forms the first low. First, you can wait for the price to cross below the neckline, which would confirm the double-top pattern and perhaps signal a trend reversal. bitmex review It consists of a peak in the middle of two almost equal-depth troughs that follow one another. The pattern indicates that the price found resistance at a particular level and was unable to break below it.

This pattern is frequently seen by traders as a signal to sell or enter short positions in anticipation of additional market declines. In the world of forex trading, technical analysis plays a crucial role in predicting future market movements. One popular technical analysis pattern that traders often rely on is the double top pattern. This pattern is widely recognized for its ability to signal a potential trend reversal, making it a valuable tool for traders looking to maximize their profits.

1. These financial products are derivatives, meaning they enable you to go both long or short on an underlying market.
2. 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.
3. The chart below demonstrates when to place a sell order, a stop-loss, as well as when to take profits.
4. Consequently any person acting on it does so entirely at their own risk.
5. Like most other technical analysis tools, chart patterns such as the double top also come with their own distinct advantages and disadvantages.

Is double top pattern bullish or bearish?

It emerges in the form of two consecutive peaks at the end of a bullish trend, roughly recognizable as an M-shape. Technical chart patterns called double tops often point to the possibility of a reversal to a downtrend 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. As the pattern is bearish, traders may look to take sell positions after plotting of the neckline. 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. The double top pattern is a bearish reversal pattern that forms after an uptrend.

In fact, it is quite common for a trader to generate 10 consecutive losing trades under such tight stop methods. So, we could say that in FX, instead of controlling risk, ineffective stops might even increase it. Their function, then, is to determine the highest probability for a point of failure. An effective stop poses little doubt to the trader over whether they are wrong. A double-top chart pattern generally looks like the letter “M,” with two roughly equal peaks that occur after one another.

How to Trade Double Tops and Double Bottoms

To reduce risk, think about placing a stop-loss order above the most recent swing high. You can also project the vertical distance between the neckline and the highest peak downward from the neckline to determine your profit target. A double top signals a medium or long-term trend change in an asset class. But risk control in trading should be achieved through proper position size, not stops.

They can produce false signals or unsuccessful patterns, but they are useful for spotting possible trends and reversals. A failed double-top pattern could develop if the price briefly forms two peaks before continuing its upward trajectory. The breach of the neckline and other supportive signs should serve as confirmation, therefore traders should proceed with caution. In the next example using Netflix Inc. (NFLX), we can see what appears to be the formation of a double top.

What is a Double Top Pattern?

Instead, it bounced off the neckline and resumed the overall bearish trend before the first low. Here, the trend experienced a more permanent reversal and continued up through the level of resistance as the neckline. The double-top pattern is interpreted by traders and analysts as a bearish indicator. It implies that the upward trend has slowed down and that a price decrease is more likely.

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. Therefore, traders can apply indicators like RSI or Stochastics to first confirm the trend’s direction and then look to trade the pattern. As an example of a double top trade, let’s look at the price graph below. As you can see, the trend before the first peak is overall bullish, indicating a market which is rising in value. However, the upward momentum stops at the first peak and retraces down to the neckline.

Additionally, as with all indicators, it is crucial to confirm chart patterns with other aspects of technical analysis. Remember, the more confirming factors are present, the more robust and reliable a trade signal is likely to be. To correctly identify a double top pattern, it is crucial to be patient and determine the critical support level. By solely relying on the formation of two successive peaks to define a double top, you might end up with an inaccurate reading and premature exit from your position. 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.

Let’s revisit our EURUSD pattern to see if we can identify a favorable point of entry. Notice in the illustration above how the market retests the neckline as new resistance. The first plus500 forex review thing you need to know is that the initial breakout is not what triggers the trade setup. Now it’s time for the really fun part – finding out how to profit consistently from these setups.