Double Top Pattern: How to Trade Double Tops and Double Bottoms

Traders then use various tools and investment strategies to ensure they capitalise on the potential trend reversal. One of the most common strategies is to place a stop-loss order above the second peak of the pattern to protect against unexpected price movements and limit potential losses. A double top is a bearish technical pattern signalling a possible reversal of an uptrend. It occurs when an asset’s price reaches a peak level twice, with a slight dip in between, indicating that the upward momentum may be weakening. Confirmation of this pattern happens when the price drops below a support level, which corresponds to the low between the two peaks.

Place a Double Top Pattern Price Target Order

Prices drop back to a level between the two peaks referred to as the neckline. Equal highs double tops refers to the two peaks being incredibly close at similar heights. A double top pattern’s most popular technical analysis indicator is the volume indicator which helps measure buying volume and selling volume as the pattern developes. A double top pattern forms on all timeframes from intraday 1-second charts up to a yearly chart period. The pattern’s third component is the trough which forms when prices decline and pullback, forming a trough or valley. This temporary retracement suggests a brief pause in the upward price momentum.

The below strategies for trading double top and double bottom patterns are merely guidance and cannot be relied on for profit. Perhaps the most important aspect of a Double Top is to avoid jumping the gun. Wait for support to be broken in a convincing manner, and usually with an expansion of volume. A price or time filter can be applied to differentiate between valid and false support breaks.

Risk management

As you see, after the double top confirmation breakdown, the price continued lower, reaching $50.37 per share. The image below illustrates the double top breakout, and the breakout confirmation trigger. My book, Swing and Day Trading,has swing and day trading techniques and setups that may interest you.

Additionally, they can wait for at least two candles to be formed in the breakout direction. The bears managed to reverse the price down after the second local high and break out the support level. Last, by spotting a double-top pattern, traders can determine their profit goals and determine the probable downside target depending on the pattern’s height. Due to the fact that the potential profit goal is often higher than the original risk (stop-loss), this usually provides a good risk-reward ratio.

1. Rounding bottom patterns will typically occur at the end of an extended bearish trend.
2. Exiting the market at the second peak helps traders trade successfully with the Double Tops pattern.
3. When a double top or double bottom chart pattern appears, a trend reversal has begun.
4. Although the double top is used by traders around the globe due to its reliability, it has limitations that you should consider when implementing it into your trading strategy.
5. Eventually, this will meet the demand level and pause the price again.

What is a double bottom pattern?

The second part of the double-top pattern is the low that is formed. This low represents the neckline of the pattern, following which the price again starts to rise. A double bottom pattern failure is caused by a large influx of sellers, unexpected negative news, and overhead resistance. The double bottom pattern’s alternative names are a “double bottom reversal” or “twin bottom pattern”. Chris Douthit, MBA, CSPO, is a former professional trader for Goldman Sachs and the founder of OptionStrategiesInsider.com.

1. A double top pattern forex market example is illustrated on the weekly forex chart of GBP/USD currency.
2. This confirms that the market is overbought right now and can reverse anytime.
3. A double top pattern failure, also known as a “failed double top reversal”, is when a double top forms but fails.
4. A failed double-top pattern could develop if the price briefly forms two peaks before continuing its upward trajectory.
5. To set a price target, traders should subtract the distance from the break to top from the breakpoint.
6. Double top patterns are not a sure thing, and their presence alone is insufficient to provide traders with a significant statistical advantage.

The double top pattern’s entry and exit rules are relatively simple. Although they may vary depending on the timeframe you use or the trading approach you implement, the standard points can be considered fundamental. Trading a double top pattern has the potential to be profitable if done so with the right evaluation, handling of risks, and market circumstances. Profitability is not assured, and there are a number of variables that may affect the result. The pattern on the chart is bearish and points to a possible trend change from an uptrend to a downtrend. Volume analysis can offer more assurance of the correctness of the pattern.

If you are short trading an asset, ideally, you would like to enter a trade at the highest point you can during a prevailing trend and exit before it ends. As stated in other articles, “Do not try to catch a falling knife”, make sure you can see the actual pattern, allowing yourself enough margin of safety in case it is a failed double. You may double top pattern rules see this test resistance multiple times before the price breaks downward. The magnitude of the drop is usually the same distance between the drop and the second peak.

Moreover, it showed that even implementing additional tools when confirming the signals will not guarantee effective trades. Before opening a short trade, wait for a breakout of the neckline and make sure that the price reverses. After an unsuccessful attempt by buyers to raise the price above the trough, open a short trade. The appearance of a pattern in the chart means that the price has reached a maximum and is ready for a reversal. A stock chart pattern that indicates a trend reversal from a downtrend to an uptrend. A stock chart pattern that indicates a trend reversal from an uptrend to a downtrend.

Unlike some other chart patterns that require additional confirmation signals, the double top pattern provides a clear confirmation of a trend reversal once the price breaks below the support level. 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. You’ll want to look for these after a strong downtrend and wait until the price reverses above the neckline (the farthest point of the bounce-off support) as likely confirmation of the reversal.

It’s risky to enter the market as soon as the breakout occurs because of a fakeout, the situation when the price turns around after the breakout and continues to move in the same direction. The chances the breakout is valid increase when the candle closes below the neckline. If the timeframe is high, traders can even wait for the price to form a few candles.

When you see the double top and double bottom patterns and you want to place a trade, you can do so via derivatives such as CFDs. Derivatives enable you to trade rising as well as declining prices. So, depending on what you think will happen with the asset’s price when one of the double top or double bottom patterns appears, you can open a long position or a short position. The double top pattern shows that demand is outpacing supply (buyers predominate) up to the first top, causing prices to rise. The supply-demand balance then reverses; supply outpaces demand (sellers predominate), causing prices to fall.

After the confirmation of the pattern, your minimum target is equal to the size of the formation. In other words, when a stock breaks out of a double top formation, the price target is the range of the formation added to the breakout level. A double top is a bearish reversal pattern that exhibits two nearly identical price tops followed by a downward reversal in direction. The double top is seen as an area of resistance—and a signal that the price trend is about to reverse.

If the price surpasses the resistance level, the double-top pattern is invalidated. 3 – Look for a second peak indicating that prices have failed to cross the resistance level. Trading exposes you to the risk of losing more than your initial investment and incurring financial liability. Trading is suitable only for well-informed, sophisticated clients able to understand how the products being traded work and having the financial ability to bear the aforementioned risk. When observed on higher chart time frames like on the 1D or 1W charts, both patterns tell a compelling story of an imminent reversal which can last for months.