In the dynamic world of trading, whether forex, crypto, or stocks, one can encounter numerous patterns that dictate the market’s potential movements. One such well-recognized and potent pattern is the “Double Top Pattern.”
A manifestation of a bearish reversal in price trends, the double top pattern signals traders that the existing trend may be reversing from an uptrend to a downtrend.
Considered one of the most reliable patterns in technical analysis, the double-top pattern is a highly significant tool for traders, whether you’re into double-top forex trading, double-top crypto trading, or double-top stock trading.
The essence of the double top pattern meaning lies in its formation – two consecutive peaks or “tops” that form at approximately the same level, signifying a strong level of resistance.
In this article, you will learn its formation, confirmation, how to trade it, types of double top patterns, examples, and much more.
Definition
The double-top pattern is one of the various candlestick chart patterns that signal a market reversal.
Two highs of nearly equal heights make up this chart pattern. Looking closely at the double top, it looks like the letter M.
The pattern is popularly called the letter M pattern, as seen in the images below.
The pattern is easy to find and form in every time frame and is one of the top chart patterns that will earn you profitable trades.
Different Types of Double Top Pattern
There are several variations of the double top pattern that traders should be aware of:
- Standard Double Top: The most basic version of this pattern, featuring two highs of approximately the same price level.
- Double Top and Double Bottom: These patterns are the inverse of each other. While a double top signifies a bearish reversal, a double bottom indicates a bullish reversal, forming a ‘W’ pattern on the chart.
- Adam and Eve Double Top: This pattern is a variant of the double top, where the first top is sharp and swift, resembling a V shape (Adam), while the second top is more rounded and takes longer to form, resembling a U shape (Eve).
- Fake Double Top: Sometimes, the market tests a resistance level twice, but instead of reversing as expected in a typical double top, the price breaks through the resistance level and continues to climb.
How To Identify a Double Top Pattern?
A double top is a reversal pattern that forms after a market markup (uptrend). The double top halts momentum and brings the uptrend to an end.
The price reaches a resistance level that it struggles to go past. A double top is formed if the price respects this resistance level once more.
Next, a low will be made after the price rejects this specific resistance. The area where this low form is major support.
Therefore, if the price breaks this support, it is a major bearish confirmation. This support is known as the double-top neckline of the pattern.
As seen in the image above, the double top consists of two peaks with a low between them.
Moreover, a double top pattern is only confirmed when the neckline is broken.
Note: the second peak of the pattern must never be higher than the first.
What Does a Double Top Chart Pattern Tell You?
During an uptrend, higher highs and lower highs are made consecutively. This bullish pressure is bound to diminish eventually.
Sometimes, a relevant price level, resistance, is hit. What follows is a halt in the immense bullish pressure.
On an occasion where the price hits a resistance twice, forming a relatively equal pair of highs, the result is a double-top pattern.
Since the price failed to make high, this indicated indecision in the marketplace. Then, a strong downward movement below the low formed (neckline) switches the trend.
The pattern shows that buyers are slowly packing their bags. Bearish momentum is introduced into the market, and lower prices are attained.
Remember that the double top is a bearish reversal pattern; hence, we want to find them at the end of uptrends.
How do You Profit From a Double Top Pattern
Double Tops appear in an uptrend and reverse it to the downside. Drawing the neckline for the double top is easy.
A vertical line is drawn from the low in between the two tops. When the price breaks the neckline, an order can be placed instantly.
Alternatively, a retrace/ retest of the neckline of the double top can be waited for.
It is required to wait for the neckline break as it validates the pattern itself.
Therefore, you can see and employ this pattern in almost all markets, including forex, stock, and crypto.
Stop-loss Placement
Stop-loss is the most crucial variable in any trading strategy; capital should always be protected.
For this pattern, stop loss is placed above the second high.
As seen in the chart above, I placed the stop-loss slightly above the second high.
Doing this gives room for a deep retrace and reduces the chance of getting stopped from a really good trade, as shown below.
Profit Target
To calculate your take profit, the pip count between the second high and the neckline is calculated.
Often, the price tends to blast past this take profit. So, a trailing stop can be placed once it’s hit or partials are taken.
The pattern isn’t bullish. Instead, it indicates a bullish-bearish reversal. The double top is a reversal signal that forms at the end of a strong uptrend. The price makes a high and fails to go above, forming this pattern.
The double-top pattern is quite accurate when some rules are observed. The first is always to ensure the second peak is equal to or lower than the first.
Further, a neckline break confirms the double top pattern so it has to be waited for.
Summary: How To Utilize Double Top Patterns Ultimate Guide
The is simple, but it can be very effective. However, things can also go bad quickly when used incorrectly.
Therefore, patience must be exercised to ensure the pattern is valid. Also, a significant problem with this chart pattern is the stop loss is too large.
Remember, you can never have too much confirmation in forex trading.
Hence, the double-top pattern can be used with a momentum indicator, stochastic oscillator, and Relative Strength Indicator(RSI). If one of these indicators signals an overbought condition, it is an additional confirmation.
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