The double top pattern is one of the various candlestick chart patterns that signal a market reversal.
In this case, the double top pattern indicates a bullish to bearish reversal.
Two highs of nearly equal heights make up this chart pattern. Looking closely at the double top pattern, it looks like the letter M.
The pattern is popularly called the letter M pattern as you will see in the images below.
Moving on, 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.
How Do You Know If You Have 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 which it struggles to go past. If the price respects this level of resistance once more, a double top is formed.
Next, after the price rejected this certain resistance, a low will be made. 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 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 double top 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.
Keep in mind 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 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 – Letter M Strategy
The most important variable in any trading system is the stop-loss, 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 out of a really good trade as shown below.
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.
Is a Double Top Pattern Bullish?
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 pattern isn’t bullish, instead, it indicates a bullish-bearish reversal.
On any financial chart, find two equal highs with relatively the same height. Next, ensure a candlestick closes below the neckline before executing an order. A stop-loss must be placed above the second high.
The double top pattern is quite accurate when some rules are observed. The first is to always 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 Double Top pattern is a simple pattern, but it can be very effective. However, things can go bad quickly when it’s not used correctly.
Therefore, patience has to be exercised to endure the pattern is valid. Also, a major 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 RSI. If one of these indicators happens to signal an overbought condition, it is an additional confirmation.