Double top pattern: an advance price action analysis

Definition of a Double top pattern

A double top pattern is an advanced price action charting analysis that tells you a change in an uptrend and the price is ready to take a reversal from these high points.

a double top chart pattern is relatively reliable and easy to trade and formed when the price fails to break the previous high and reacts immediately

a double top pattern looks like the English alphabet “M” which helps you to identify the pattern easily

after this pattern formation market usually start falling down it may be a sign of a bear market but you have to check some point to validate the pattern in this post you will learn all about the double top pattern.

Double top pattern: Logic and psychology

When the market is in an uptrend buyers are active and they aggressively create the demand and push the price higher and make a new market top

Double top pattern

after the new market top, some profit booking starts, and sellers also start selling to push down the market lower but this time bear could not take control of the market.

then buyers again start heavy buying and push the market up but fail to break the previous high and start losing their control of the market

at this point, sellers activate and add a fresh selling position into the market and push down the market aggressively from here sellers control the market and buyers start losing their money

thus buyers get panic and start selling to close their position in the market thus the result of this creates heavy selling in the market

after this market breaks the neckline and changes the trend to a downtrend

How to identify valid Double Top

The double top pattern forms very frequently at the end of the strong bull market but many times it gives the false formation of double top

In price action trading, there are a few rules for every chart pattern by which you can identify a valid chart pattern, double top pattern also has some rules for their validation.

  1. in price action, you can not ignore the importance of volume, It plays a key role in pattern analysis when the double top pattern forms you will see heavy volume at the first stop after that volume starts declining and will be less at the end of the second top
  2. when price breaks the neckline volume will be more and confirm the valid breakout you can use twenty days SMA on the volume chart for your analysis purpose.
  3. if the volume is not anticipated with the pattern it may give you a single false pattern.

you can also use time duration for valid pattern formation, the more the time difference between the first stop and second top more accurate the pattern.

if both the tops are very close in time there is more chance that price can resume their trend or give you false information.

For a more valid pattern, use one or two indicators like RSI or MACD, RSI divergence can give you the correct information about pattern validity.

if the indicator is diverging during the double top formation it will be very easy for you to identify the valid pattern.

Entry, Stoploss, and Traget:

The purpose of identifying the chart pattern is to find out the right entry point, stop loss, and target point once you have found the double top pattern use the below-given information for your entry stop loss and target.

double top pattern

ENTRY POINT: take an entry ( sell position ) when the price breaks the neckline and again retest the breakout point (neckline) but before taking the position must confirm the volume at the breakout point it should be more than twenty days SMA.

STOP LOSS: Place a stop loss in the middle of the pattern range ( arrow indicating the stop loss in the above picture)

TARGET: always place the target with an equal range of pattern range (distance between first top and neckline)

CAUTION: Before taking the entry always confirm there should not be an Event or high-impact news in near future.

The double top pattern in trading

Here are a few examples of double top chart patterns with live entry, stop loss and target point.

AMARAJABAT:

double top pattern

above the chart is AMARAJA BATTERY making an ideal double top pattern, you can see the stock was in a strong uptrend” and at the end of this strong bull trend, AMARAJABAT” made the first top at price 1020 then retrace back to the recent higher low.

draw a support line when the price failed to break the last low after a new high called a neckline.

After the correction stock again rebound from the neckline or support line but failed to break the recent high and start declining and made a second top that was not exactly equal to the last high but near about 1019 identical same to the previous high.

after failing to make a new high price declined and broke the neckline at the price of 917 this would be identified as the double top breakpoint.

After this successful breakout wait for the retest, as you can see above chart price once reached the breakout point or neckline area.

once the price retests the neckline ( breakout point ) an ideal sell entry was active at the price range of 916-917 with the stop loss of 960.

above chart, after the retest price started declining and continued a good downtrend as per above chart your target should be 810 because the pattern range was 103 points ( top 1020- neckline 917) thus you took entry at 916-917 with the target of 103 points.

for your better understanding, you can see the bar range on the chart which is 99.52 points there are two price bars one is at the pattern area and another is shoeing target range area both are the same.

ADA/CAD FOREX CHART

double top chart pattern

Above you see a standard double top chart pattern of ADA/CAD. the chart time frame is 2-hrs.

the first range indicates the double top figure as the first top was formed a little higher than the second top but before making a standard double top chart pattern price was in a strong uptrend, the blue arrow is indicating the trend direction.

the second price range indicates the neckline area and breakout/retest area, you can also see two red areas both equal in size but indicating different zone.

the first red area indicates the double top pattern range and the second red area indicates the target range as you notice that first top is slightly higher than the second top so we use this top to measure the pattern price range.

now we know the range of double top patterns after it is confirmed, as the price breaks the neckline and retest it again so as per our trading rule you will take a sell entry near the retest and place a stop-loss near the 50 percent( half) of pattern range.

target will be the same as the double top range as indicated in the red area.

Caution: Always try to take entry after a successful retest this will increase your probability to win.

Key points:

  1. The double top is a reversal chart pattern that typically indicates the end of the uptrend.
  2. The double top chart pattern can be found on any chart like candlesticks charts, bar charts, line charts, or many more.
  3. As this pattern shape is like the English alphabet “M” it is easy to identify.
  4. Uses of volume indicator and RSI can be more profitable with the double top chart pattern.
  5. Risk management and position sizing are the key factors for reversal chart patterns.

BONUS TIPS:

  1. Candlesticks patterns like hammer, pin bar, and bearish engulfing will add more accuracy
  2. A combination of double top pattern and rsi divergence, MACD divergence is a deadly duo.

SEE ALSO:

  1. price action trading strategy
  2. price action and market structure

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