A double top is the easiest chart pattern. In this post, you will learn how to trade it with the lowest risk and over 80% winning rate. Moreover, I will break some of the myths about the double top.
Double top pattern formation
The double top chart pattern has two peaks that are formed when the price hits a certain level that can’t be broken.
Another important feature is the neckline. In other words, it is a support. The formation of this double top is completed when the prices move back to the neckline after forming the second peak. You could read in books the second high should not cross the previous. But in real trading, it doesn’t really matter. Moreover, very often we have a tradable chart pattern with the second top a bit higher than the previous one. It is all more about your imagination and ability to spot patterns.
How to trade a double top chart pattern?
First of all, the market doesn’t reverse because you see the double top in the chart. There has to be a fundamental cause for a trend change. So, how to spot it? Market reverses if there is a fundamental setup. It includes cycles, seasonal, COT, insider accumulation, etc. I have explained setups for each market in my trading course. You can get over 80% winning rate trading the double top when there is a fundamental cause for reversal.
Aggressive entry technique
A swing failure (rejection with significant volume) is a sign of weakness and potential pullback at least. So, once the price gets rejected near the double top, aggressive traders can consider shorts with stop loss above the high of swing failure. The realistic target for this entry is a retest of double top support or the so-called ‘neckline’.
Conservative entry technique
Conservative traders should wait for a qualified breakdown of double top support. What do we call qualified breakout? If the price consolidates for some time in a tight range near double top support and then breaks down, we have our qualified entry. Note, breakdown without tight consolidation very often gives false signals. So, we want to stick to qualified entry to filter trades and get the highest winning rate. In this case, the stop loss is the high of the consolidation zone. And, the targets can be set by Fibo or Gann levels.
Is double top a bearish reversal pattern?
Based on all book studies double top is a reversal pattern. But, it is just a myth. And, based on my 12 years of experience, I can assure you the double top is also a great trend continuation pattern. Why not trade it if it is formed in a strong downtrend? It has lower risk because you follow the trend.
To have over 80% winning rate trading double top, follow it when the market is set up for a reversal. In other words, when there is a fundamental cause for a trend change. Moreover, trading double top as a trend continuation pattern helps to reduce risks.
Double top pattern [Complete Guide] by Inna Rosputnia
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