Double Top Chart Pattern

Double Top Chart Pattern

As we are about to discuss a new pattern, we need to be familiar with “support and resistance “.

chart pattern

The double top pattern is a reversal chart found at the peak of an upward trend. Henceforth acknowledged as a bearish pattern.

We can learn and understand from the signals issued in this pattern that, the trend is about to weaken and reverse. We will look for “selling opportunities” once we see this signal.

How do we identify a double top pattern?

The illustration below will indicate a couple of highs and a neckline.

chart pattern

The “highs” show that the price has aimed to break through a resistance level before reversal. The neckline is the bottom part of the pattern.

Number 1: First high

Number 2: Second high

Number 3: Neckline

Number - 1 First- high: Although the buyers tried to push the price through a resistance level, they were not successful. This is because of the sellers entering the market.

Number - 2-Second-high: The buyers made a second attempt, but again were not successful to break through to new highs. We need to understand that; this is due to the conquering of market made by the sellers over buyers once again.

Analyze the situation: Now we can read the situation. As it is evident that the buyers were not successful in pushing the price through resistance level and the price reversed downside. It is notable that; more sellers enter the market as a result.

To be a genuine & effective double top pattern, it is necessary that, the price must break the neckline of the pattern.

We can look for potential “selling opportunities” as soon as the pattern has been identified on the price charts.

Practice session:

How to spot double top patterns in the following exercises:

Exercise 1: Identify the double top pattern Show exercise

Exercise 2: Identify the double top pattern Show exercise

Techniques for Trading the double top method:

There are two different strategies that can be adopted.

Technique 1:

The illustration below shows:

Observe the neckline that is marked.

Enter the market with a “sell order” as soon as the price breaks through.

Short traders can enter the market when the neckline is broken by the price.

The “Stop loss” is placed above the double top. If the price trades beyond this point, the pattern has failed & we need not be in the market any longer.

The height of the actual pattern and extending that distance down from the neckline gives “profit target”.

The illustration below demonstrates the stop loss in Block & take profit levels in block.

chart pattern

Number 1: First high

Number 2: Second high

Number 3: Neckline

Number 4: Height of the pattern (white shaded area)

Number 5: Same distance as the height of the pattern (white shaded area)

ES-1 “Short entry” at break of the neckline

SL-2 “Stop loss” placed above the highs of the pattern

TP-3 “Profit target” placed the same distance away as the height of the pattern, down from the neckline

Practice session:

Where to place the entry, stop loss and take profit in the following exercise:

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

Technique 2:

Wait for the price to trade below the neckline (broken support).

Find to place a sell order on the retest of the neckline as resistance (Note: Broken support now becomes resistance).

The “stop loss” would go above the new resistance area.

The profit target would remain the same as in the first example.

The illustration below shows the application of second technique represented by the following colors:

The entry – Header Line, stop loss – Block color upper side line & take profit levels – Down the Line in block colour

chart pattern

Number 1 First high

Number 2-Second-high

Number 3 Neckline

Number 4 Height of the pattern in white shaded area.

Number 5 Same distance as the height of the pattern in White shaded area.

ES-1 Short entry at the retest of the neckline as resistance.

SL-2 Stop loss placed just above resistance, after the price has retested the neckline.

TP-3 Profit target places the same distance away as the height of the pattern, down from the neckline.

Practice session:

Where to place the entry, stop loss & take profit according to second technique in the following exercise:

Exercise 1: Where would you place your entry, stop loss and profit target? Show exercise

Nut Shell

An overview of the lesson discussed so far…

Selling opportunity: This pattern signals potential selling opportunities with a possible move downside.

Techniques to trade the pattern: There are two techniques that can be adopted in trading this pattern.

Technique 1: This pattern can be traded on the break of the neckline.

The “stop loss” is placed above the pattern.

The “profit target” - the same distance as the height of the pattern, down from the neckline.

Technique 2:

Also, enter after the price has already broken through the neckline and has retested it as resistance.

Place the stop loss above the resistance level.

Down the neckline, the profit target - the same distance as the height of the pattern.