Double Top Chart Pattern Trading Strategy: Backtest & Example

It develops when the price of an asset twice reaches a resistance level, fails to break through it, and then starts to fall. The measure rule allows for the determination of the amplitude for the expected price move after a breakout of the confirmation line. The height is then subtracted from the formation trough.For double bottoms, the take profit is determined from the height given by subtracting the formation peak with the lowest trough. Double bottoms are a bullish pattern commonly found in double top pattern rules downtrends and characterized by two consecutive troughs located at a similar level, separated by a peak.

What Trading Strategies are Suited for Double Top Chart Pattern?

Momentum Trading is widely regarded as one of the top trading strategiesfor identifying short-term declines in trending markets. The double top pattern differs from other types of chart patterns in its structure and the reversal signal it provides. The double top pattern features two peaks at the same level, indicating a potential downtrend, unlike triangles and flag patterns. Triangle and flag patterns suggest trend continuation, with converging trend lines or parallel lines rather than a clear reversal. Similar to any other chart patterns, the best way to identify potential targets is to use price action as the key variable. To reconfirm the formation of a double top pattern, the trader may also estimate a potential market move once the formation of a double top pattern is spotted.

The double top pattern common trading mistakes are using large amounts of trading leverage, ignoring important news announcements, and wrong stop-loss order placement. The signaling potency of the pattern may be further enhanced by this volume increase. Therefore, in some ways, a double top can be a more predictable, reliable pattern compared to other strategies.

The double top pattern’s accuracy is higher when the peaks are clearly defined and separated, which signals a strong resistance level where the price struggles to break through. Peaks with minimal deviation in height indicate that the double top chart pattern is forming correctly and that a bearish reversal is likely to occur due to consistent market sentiment. Peaks that are not well-defined or too close together lead to weaker signals, reducing the double top chart formation’s success rate.

• The double top pattern provides Forex, stock, cryptocurrency and commodity traders with a clear indication of market exhaustion and potential trend reversals.
• That’s the kind of return you can achieve with this setup if you trade it the right way at the right time.
• Techniques like adding distance to the breakout level can also help reduce false signals.
• Double tops/bottoms are relatively frequent and easy formations to identify and use.
• A double top pattern entry point is set when the price moves below the support line of the pattern.

To make the most of this candlestick setup, a trader must know how to test the neckline as a form of resistance. The double top is considered a reliable indicator of a potential trend reversal, especially when confirmed with other technical indicators. The example above confirmed that the double top formation can’t provide signals that are 100% accurate. Moreover, it showed that even implementing additional tools when confirming the signals will not guarantee effective trades. This means that the neckline will turn into a resistance level after the breakout.

What Happens After a Double Top Pattern Forms?

• When price rejects the same support a second time, the double bottom is created.
• The high trading volume reflects the increased intensity of selling pressure at the resistance level.
• The RSI indicator has a bearish divergence with the price chart, which is supposed to confirm a price decline (1).
• A double-top pattern is a bearish reversal chart pattern that is formed after an uptrend.
• A risk of 1% of trading capital is the risk amount when trading double tops so traders adjust their postion size accordingly.

The double top chart formation assists traders when setting precise entry points for short trade positions. The neckline becomes critical for confirming the double top pattern’s validity by acting as a support level between the two peaks. A decisive break below the neckline validates the bearish reversal, providing a clear signal for traders to enter short trades.

Pros and Cons of the Double Top and Double Bottom Patterns

These trading indicators help find a technical reversal and technical trend change. The break of the neckline, a horizontal line formed between the lows of the troughs, is frequently used by traders to confirm the pattern. It is considered a signal to start short positions or sell when the price crosses below the neckline, with the expectation that the price will continue to decrease. In the next example using Netflix Inc. (NFLX), we can see what appears to be the formation of a double top. However, in this case, we see that support is never broken or even tested as the stock continues to rise along an uptrend. However, later in the chart, the stock forms another apparent double top in June and July.

So, you need to be prepared for the worst-case scenario by setting a stop-loss order in advance to avoid unnecessary losses if the market goes against you. Keep in mind that there is always the chance that your trades won’t go your way, and that’s just part of the game. Eve peaks normally appear wide and rounded like inverted U’s, but they’re not exactly the same in size and they don’t have to be perfectly symmetrical. This decline should make each top stand out individually as its own minor high, rather than blending together to form a bigger one. But, you need to make sure that this stop-loss price does not get compromised based on any gut move or any market threat. Furthermore, when you have the whole range, you can consider it as your MINIMUM target.

Breakout traders wait for volume confirmation and price action within the double top pattern that sustains below the support level before entering positions. The double top pattern features two peaks at approximately the same price level, forming an “M” shape that signifies a strong resistance level. The structure is characterized by two distinct peaks with a pronounced dip between them.