menu-caret
As seen on:
ntv-logo sky-logo comedy-central-logo

Can I enter reversal trades with the double top pattern?

Can I enter reversal trades with the double top pattern?
Asked by
Dennis Mayer time-icon6 days ago
1 Answer Answer Question

Sheila Olson
Answered time-icon6 days ago

The double pattern is one of the most popular technical patterns among forex and stock traders. It’s simply a chart pattern that has two swing highs at a strong resistance zone, which are very close in price. Traders can see this pattern in all time frames, from the five-minute interval to the weekly interval.

How can I identify the double top pattern on a price chart?

There are three requirements a trader should look out for to detect a reversal trade in a currency or stock market. They are:

  • Two swing highs (peak) that are almost equal in price
  • An equivalent distance in terms of the time between peaks
  • Price volume depreciates on the second top

Above is a graphical representation of how the double top looks.

From the above illustration, we see price moving upward and then being reversed by the strong resistance level at the first top. Then, the price hits a support line downward, which generates momentum to shoot it back up. Once again, the price gets rejected by the strong resistance level.

Traders can run into trouble with this chart pattern if they enter a trade when they see double tops on the charts without waiting for confirmation.

Traders can only confirm and trade the double top pattern when price closes below the neckline, which is the support level. At this point, price sees the first part of its breakout from the support level.

Typically, double tops have a more significant amount of potential breakout because price moves back and forth within a limited range. Therefore, there will be an expansion in the price movement and volume when price breaks out. These breakouts can happen to both the downside and upside.

When traders enter a breakout of the double chart pattern, they set their stop below and above the support and resistance level respectively.

Another way to forecast the direction of the price after a double top is by looking out for two concepts:

Measured move: The distance, in pips, of the price from the broken level of the pattern to a future point in the market.

Measured objective: The level in a market where price finds an increase of sell and buy orders.

In simpler terms, a measured move identifies the distance of price, while a measured objective move specifies the exact target or level a trader should enter.

Below is a chart showing the measured move objective in a double top pattern

In the above chart for EUR/USD, we see the measured move objective plotted, which is 568 pips away from the neckline. At that point, the price reacts, indicating a good time to exit a trade. Traders can also watch this level in the future to trade breakouts if possible.

 

How to enter a trade with the double top

Most experienced traders know that the best time to trade the double pattern is not when price breaks out of the support level. Instead, the best confirmation is when the price comes to retest the level after breaking out from it initially.

Traders who seek a favourable risk-to-reward ratio always wait for the price to retest the neckline, making it a new resistance level. This can help them make more significant and consistent trades.

The diagram below shows the reaction of the double top pattern on a chart and the best time to enter a position.

In the above illustration, we can see how price retests the neckline or support line. Then, it becomes the new resistance. At this point, traders enter a sell trade in the market and make huge profits.

The price showing a double top pattern on the EUR/USD chart

In the above table, we can see the double top pattern play out in a real-time chart of EUR/USD.

Here, we see a strong support level formed at 1.12912, which pushes price 524 pips upward until it gets to the 1.13436 level at the second top. The strong resistance at the level caused the price to move downward, where it broke the 1.13436 level, retested, and became a strong resistance.

 

The bottom line

Experienced reversal traders believe that the double top pattern is one of the best technical chart patterns to trade the price reversals at all time frames, especially when coming from an uptrend.

To confirm the chart pattern, traders would have to wait for the price to break the neckline and get retested before entering a sell position. Traders can take profits or exit the market by using the measured move objective.

Nevertheless, it’s crucial to avoid trading this chart pattern alone. Traders should combine it with other trading tools and instruments that show the volume and momentum of price on the market.

Login or Register to answer this question

question-icon 1 view-icon 35