Double Top Pattern: Overview, Components, How To Trade and Examples

When the support zone breaks, then it means buyers have lost the momentum and sellers are on hold now. Let’s analyze the pattern in more detail using XAUUSD as an example. The double top pattern reflects investor psychology where the price reaches a high level twice but fails to rise further, signalling that buying momentum is weakening. As a result, selling pressure increases, leading to the price to fall. First, you can wait for the price to cross below the neckline, which would confirm the double-top pattern and perhaps signal a trend reversal. You can start a short trade or sell position after the break happens.

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. A Double Top pattern is a bearish reversal chart pattern that signals a potential change in trend direction from bullish to bearish. The ‘M’ shaped double-top pattern, is the exact opposite of the ‘W’ shaped double-bottom pattern.

Triple tops and bottoms are can be traded in a similar way to double tops and double bottoms, and they aim to provide the same information to the trader. Double tops and bottoms can be used to trade shares​​ and stock indices. Aspects of fundamental analysis​​ can have a dramatic effect on the share price, which may overshadow the double double top pattern rules top or bottom pattern. For example, a double bottom may form on a price chart, making a stock look enticing to trade. If a poor earnings report comes out, the price may plummet, despite the double bottom pattern. Therefore, you should take special care when trading around these events.

As you can see from the diagram above, the market made an extended move higher but was quickly rejected by resistance (first top). So let’s look at the characteristics of the pattern using the illustration below. The Japanese yen remains under pressure, trading near a five-month low against the US dollar. This trend is primarily driven by differences in monetary policy approaches. This article represents the opinion of the Companies operating under the FXOpen brand only.

1. However, like all technical indicators, it is not foolproof and should be used in conjunction with other analysis tools.
2. Its formation is easily identifiable on price charts, making it easier for traders to recognise potential reversal signals.
3. Similarly, when prices break below the lower band, they indicate an oversold market and a downtrend reversal.
4. Enter a short position at the breakout point, place a stop-loss above the second peak, and set a target based on the distance between the peaks and the trough.
5. The RSI indicator has a bearish divergence with the price chart, which is supposed to confirm a price decline (1).

If the price reaches the support line, then the further downtrend will intensify. However, there are situations when buyers manage to hold the support level, and the price goes up, which means there are false breakouts of support. In this case, the probability of a triple top pattern with the formation of the third price high increases. This pattern’s highs can be placed at the same level or in growing order. The three mountains pattern is formed much less frequently on candlestick charts.

Traders value the double top pattern as an ideal technical indicator as it helps them identify a potential trend reversal in the price of a stock. The pattern suggests that the price has hit a resistance level twice but failed to break through, signalling that buying pressure may be weakening. The stock loses demand because of the weak buying pressure, and the share price starts falling, creating a bearish trend. Traders confirm the double top pattern when the stock price breaches the trough between the two almost identical price peaks.

What Markets Do Double Bottom Patterns Form In?

Then, the price rallies above the prior swing high, creating a new swing high. Uptrends make higher swing highs, and that is what a completed double bottom pattern creates. The unequal highs double tops are ‘M’ patterns with forms with peaks at different highs. These unequal highs double tops are stronger reversal signals, as they often indicate a liquidity grab. To identify the double top, start by looking for the pattern at resistance levels. When the price rejects heavily from the first peak, the potential for a double top to form increases.

Traders commonly open a short position at the top of the second high to maximise the profits from the bearish trend reversal. A double top pattern is a bearish pattern in technical analysis that signals a bearish reversal of an uptrend. Double top patterns are completed when the price decreases below the support trendline of the trough that separates the two peaks. A double top pattern resembles the letter “M” of the English alphabet.

Additionally, a trough is formed between the two peaks as a short downward correction. Plus, there’s often a definite resistance level that is formed when two peaks at roughly the same price level appear consecutively. This level can be used by traders as a benchmark for establishing stop-loss orders and profit objectives, improving risk management, and trade planning. Trading using the double top pattern involves the use of bear market trading strategies such as shorting or holding on to the securities until there is a bullish trend reversal. There are mainly three steps to trading using the double-top pattern, which are listed below. Fourthly, the price moves higher from the support zone and starts to penetrate the resistance area’s price breakout level rendering the double bottom pattern formation completed.

1. Not only is it not complete, but attempting to enter before having a confirmed setup can get you in a lot of trouble.
2. This is a sign that the selling pressure is about finished, and that a reversal is about to occur.
3. The red horizontal line on the bottom between the two tops is the signal line.
4. A double bottom pattern target is set by calculating the height between the horizontal resistance trendline and the swing low trough level and adding this number to the buy entry point.
5. After a double bottom, common trading strategies include long positions that will profit from a rising security price.
6. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information.
7. Indicators are “drawn” over the chart, like the vertical yellow line in the image above.

Set A Stop-Loss Order Above Breakdown Candlestick High Price

The two main disadvantages of the double-top pattern are its tendency to produce false signals and the difficulty involved in spotting and confirming the pattern. The double-top pattern is confirmed only when the second price drop crosses the low of the neckline that was formed by the initial price drop. The formation of the second resistance level indicates that the bulls are unable to The bears again take over, once the second peak is reached.

Ready for the Next Trading Step?

The double top pattern indicates a bearish reversal and warns traders about a possible trend reversal down at the top. This pattern is often found in the Forex market, as well as in the cryptocurrency, stock, and commodity markets. The double top is used by traders for both intraday and long-term trading. Third, you can use extra technical indicators or oscillators to make the double-top pattern more reliable. Following the stop-loss and profit target criteria described above, you can place a short trade once the neckline is broken when the indicators confirm the bearish signal.

Yes, there are primarily two rules which must be followed while trading with the double top pattern including proper identification and proper confirmation of the pattern. Proper identification implies that the pattern must have two highs and a low in between. The price retracement after the second high must be more drastic than the initial retracement. The second must also not break the resistance level created by the prior high. The second double bottom pattern trading step is to enter a buy trade when the market rises above the horizontal resistance level. A double bottom pattern means a potential reversal from bearish price action to bullish price action is imminent and market participants are anticipating bull trending markets.

The height of the pattern can also be used to predict profit targets, giving traders a distinct moment at which to exit. Yes, the ‘M’ indicates a bearish trend reversal for the double top pattern as the shape ends with a downward movement. The double-top pattern forms at the end of a bullish uptrend and witnesses a price drop to a low. The prices then pick up from the low to a level close to the prior high.

A trader can trade the Double Bottoms chart pattern by opening a long position in the market and buying currency pairs before the prices start to increase continuously. Since the Double Bottoms indicate a bullish trend reversal, the traders are able to make an entry decision well in time as soon as the second bottom occurs in the market. According to the double top pattern trading rules, short trades should be opened after a test of broken out support. The profit target is determined by the distance from the tops to the neckline, that is, traders can immediately determine the further movement. However, when important news is published, and in other cases, quotes drop even lower. Stop-loss, according to the risk management rules, is set above the broken out support level.