Double Top Pattern Explained Trading & Technical Analysis

double top pattern rules

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. However, measuring the take-profit target and considering trading volumes is vital. As with all other chart patterns, the double top pattern is not to be used on its own.

  • Now that we know the size of the figure after the double top is confirmed we need to calculate our minimum target.
  • The first wave of sellers takes the profit, and the second wave, realizing that they have just been somewhat used, closes positions with a loss.
  • It occurs when the opening price of a trading period has risen or fallen significantly compared to the closing price of the previous trading session.
  • Or, in other words – a retest and failure of the previous highest price.
  • For that reason, below we’ll show you two examples where the double top pattern can be found.

A double top is a reversal pattern that is formed at price highs and warns of a downward trend reversal. The pattern formation allows traders to enter profitable short trades. You can calculate the entry points to the trade in advance according to the pattern and set stop loss and take profit. A double top pattern is a bearish reversal chart pattern that is formed after an uptrend.

Potential profit is calculated as the distance from the support level to the high and will equal a possible Take Profit. A Double Top pattern looks like two highs formed one after the other. Theoretically, buyers drive the price to the high, and then a part of them starts to lock their positions, thus decreasing the quotations.

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A double top is a reversal pattern that is formed after there is an extended move up. When a stock is staying bullish consistently and reaches its prime high before it starts dropping. The average rise is the measure of the price movement from the breakout point to the above described prime point i.e. ultimate high. These double top pattern rules steps, if happen, will provide you with a confirmation of this pattern formation and you can initiate your analysis towards this direction. An important aspect of the double top pattern is to spot a close below the neckline. Simply spotting two tops at a specific level does not constitute a double top pattern.

As a fourth step, the ideal time to initiate selling is when a shift in momentum is detected. This is the much-awaited breakout and indicates a time to start making profits. Thirdly, it is important to keep in mind that a variation of 10 pips, occurring between the two tops, is the maximum a trader can look for, although flexibility is recommended.

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The black lines on the image follow the price action, which confirms the double top. Once the price broke the signal line, I used the range to calculate the price target of the pattern. Above is the 2-minute chart of Hewlett-Packard from Jan 14, 2016.

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The two tops in the double top pattern are indicators of resistance in the market. From a different perspective, it means that the market tested the same resistance level twice and was rejected both times. Double top patterns are noteworthy technical trading structures to learn and integrate into a trader’s arsenal. Double tops can enhance technical analysis when trading both forex or stocks, making the pattern highly versatile in nature. The bottom between the two tops is the signal line which is used to confirm the pattern.

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A double top is a popular technical analysis tool that allows traders to forecast a trend reversal. It’s one of the most common patterns and it can be easily found in any timeframe of any asset. This FXOpen article will guide you through the fundamental trading rules of this formation.

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The pattern is confirmed once the price falls below a support level equivalent to the low between the two previous peaks. Like most other technical analysis tools, chart patterns such as the double top also come with their own distinct advantages and disadvantages. To fully harness this technical indicator in your trading strategy, it’s essential to understand where it triumphs and where it can fall short. After the buyers tried to return the quotes to the first local high, the sellers became more active in the market. Double Top Pattern and Double Bottom Patterns are types of price reversal patterns. Looking at the charts on history, we may note that this does not necessarily happen, and the trend may reverse without special patterns.

Double Top

Another attempt on the rally up to the second peak should be on a lower volume. In many ways, a double top looks very similar to a double bottom with the exception of the peaks. A double top results in consecutive “highs”, while a double bottom results in consecutive “bottoms”.

double top pattern rules

When choosing a timeframe for trading, make sure that the SL is not against your money management rules. A gap is an area of price gaps and discontinuity on a financial instrument’s chart. It occurs when the opening price of a trading period has risen or fallen significantly compared to the closing price of the previous trading session. Let us get started with the formation principles of the patterns.

Everything About the Double Top Pattern in One Video

This is because forex traders who use a double top pattern look for a trend reversal pattern, which usually is easier to identify at the end of an uptrend. The slowing momentum and price consolidation near the second peak typically indicate a bearish trend reversal. The pattern is commonly seen when an uptrend comes to an end and is confirmed by two last attempts to break below the resistance level. A double top pattern is a bearish price reversal that signals the end of a bullish market.

  • However, later in the chart one can see that the stock again forms what appears to be a double top in June and July.
  • Stock market volatility (movement) is much less frenetic as displayed by the ‘smoother’ chart construction.
  • In this case, chances are that the pattern starts working off, and there will be no third wave of buyers.
  • To learn more about a reversal pattern that occurs at a swing low, be sure to read the lesson on the double bottom pattern.

These sorts of price dynamics give a double top on a candlestick chart. Before trading or choosing a chart pattern to trade on a live account, you must understand the logic of pattern formation. It doesn’t matter if it’s a double top or a head and shoulders pattern, the best and most efficient way of finding a profit target is to use simple price action levels.

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The price target for the stock is obtained by adding this range of formation of the pattern to the breakout level. The double top pattern entails two high points within a market which signifies an impending bearish reversal signal. A measured decline in price will occur between the two high points, showing some resistance at the price highs.