Double top and double bottom Wikipedia
The double top chart formation should feature two distinct peaks double top pattern rules at a similar price level, separated by a trough. The peaks need to align closely, within a 1% to 3% price difference, reflecting a failed attempt by buyers to push the price higher. Momentum trading strategies become relevant after the double top pattern completes and downward momentum accelerates.
Equity markets impose stricter spatial requirements—the two peaks must form over 6-12 weeks with ≤3% price variance to filter out noise. The neckline often coincides with moving averages (e.g., 50-day MA) or prior support levels that transition to resistance. Institutional traders await quarterly earnings reports after neckline breaks to confirm bearish momentum, as fundamental deterioration frequently accelerates declines. Short interest ratios exceeding 5% during the second peak enhance pattern validity, indicating growing bearish sentiment.
Horizontal Support Trendline (Neckline)
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- Retesting means that a trader waits to see whether the market breaks the neckline.
- As a final step, set the minimum profit target as two or three times the distance from the double top to the neckline.
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In this FXOpen article, we will explore how to spot the double top formation on a price chart and use it to build your own trading strategy. There’s a very simple trading technique or strategy that you can use to short the highs of Double Top. And then I’ll discuss when is the best time to trade the breakdown of this chart pattern, and why you want to do so. The valley is from the support level to the lowest low between the two low points of the double bottom.
Conduct Post-Trade Analysis
In practical situations, the two tops may not happen at exactly the same price level. On the other hand, a measured move refers to the distance, measured in pips, starting from the pattern’s broken level to a specific future point. To put it in another way, the measured move is an estimation of distance, while the measured objective defines the exact target or level. An important aspect of the double top pattern is to spot a close below the neckline. Simply spotting two tops at a specific level does not constitute a double top pattern. The first peak should show strong volume, while the second peak should show noticeably lower volume, creating a bearish divergence.
Double Top Pattern Trading
- It’s up to you to test and decide which stop loss to employ, as the win rate can vary depending on the asset you’re trading.
- But, this time, strength in the market is waning and is not able to maintain a break above the first peak.
- The double top pattern helps Forex, stock, cryptocurrency and commodity traders identify potential shifts from an uptrend to a downtrend, offering opportunities for profitable short positions.
- The pattern suggests that the cryptocurrency has reached a resistance level twice and has failed to break through.
As you push towards the peak of the hill, you come crashing down once again. This is basically what the double top is depicting – exhausting buyers who have failed to push the price higher. The pattern was invalid because there was no candle close below the neckline. On higher time frames like 4H, daily, or weekly, the double top may indicate the start of a bear market. The original definition of a double pattern does state that it’s beneficial if the last move down from the second top is carried out with heavy volume. This way, you will have more confidence in your trade and you will be able to minimize your risk exposure at the same time.
Double top pattern risk management is set by placing a stop-loss order above the breakout candlestick price high. A risk of 1% of trading capital is the risk amount when trading double tops so traders adjust their postion size accordingly. A good entry point for traders to start short positions is the break of the neckline in a double-top formation.
Once liquidity is absorbed, the price typically moves upward toward the resistance level. Sarah Abbas is an SEO content writer with close to two years of experience creating educational content on finance and trading. Sarah brings a unique approach by combining creativity with clarity, transforming complex concepts into content that’s easy to grasp. The Price action course is the in-depth advanced training on assessing, making and managing high probability price action trades.