Double top pattern and how to trade it

What is a double top pattern?

A double top pattern is a bearish technical reversal chart pattern. It occurs when the price of an asset rises to a peak, declines, then rises again to a similar peak before a more significant decline. This pattern is confirmed when the asset’s price falls below the support level, which is the lowest point between the two peaks.

The double top pattern strategy is based on simple yet effective trading rules. When implemented correctly, it can significantly impact your trading outcomes. This versatile strategy works across various markets and can be adapted to your preferred time frame, regardless of your trading style.

How does a double top work?

The double top is characterised by two peaks above a support level known as the neckline. Here's how it works:

• First peak: After a strong bullish trend, the price hits a peak and then retreats to the neckline.
• Second peak: The price rises again, reaching a similar level as the first peak.
• Confirmation: The pattern is confirmed when the price falls below the neckline support level, indicating a prolonged bearish trend.

Traders typically enter a short position at the second peak, anticipating the bearish reversal predicted by the double top pattern. The double top pattern can also be used as a signal to exit a long position.

Identifying a double top pattern

To effectively use the double top strategy, it’s essential to understand and identify the pattern in real-time. By recognising the pattern early enough, traders can improve the possibility to profit from the bearish trend.

Spotting the double top pattern on a trading chart involves looking for the characteristic "M" shape, signifying two consecutive peaks followed by a break below the support line.

Here’s a step-by-step guide to help you identify the pattern:

• Locate the peaks: Identify the first and second peak on the price chart.
• Draw resistance line: Mark a resistance line at the peak prices.
• Draw the neckline: Draw a horizontal line (neckline) at the lowest point between the peaks.
• Watch for break: Wait for the price to break below the neckline and close below it.
• Enter short position: Once the neckline break is confirmed, initiate a short position with a tight stop-loss order slightly above the neckline.

Traders can also use double top pattern with other chart patterns or technical indicators to enhance their analysis and confirm the bearish trend before opening a trade.

Using the double top strategy in forex trading

The double top strategy is a valuable tool for trading reversals in upward price trends and using it can improve your chances of entering a short position at the right time.

Here are the key steps in using the double top strategy:

• Monitor price movements: Keep an eye on the asset’s price movements to identify potential peaks.
• Confirm the pattern: Ensure the price declines after the first peak and rises again to form the second peak.
• Set up your trade: Place your trade once the price breaks below the neckline, ensuring your stop-loss order is strategically placed to manage risk.

Remember that using the double top strategy doesn’t guarantee profits and you should always use risk management tools and strategies to protect your capital against unexpected market movements.