What are Double Tops?
The double top pattern is a bearish reversal pattern found in uptrends. The name “double top” comes from the fact that the price action consists of two consecutive peaks, with the second peak being slightly lower than the first. The double top pattern is complete when prices break below the support level that formed between the two tops. This breakout usually signals that prices are about to head lower.
Image 1. The double top pattern on the 5-minute chart on GBPUSD. Notice how the price reverts to a bearish trend after it breaks the valley between two points.
Some traders may confuse the double tops with the head and shoulder trading pattern. It is vital to note that the neckline of a double top is located between the two peaks and has a smaller height. In contrast, the midpoint of the head and shoulder pattern is larger in height.
Using Double Top Patterns
The double top pattern is a reliable reversal indicator that can be used to enter short positions with a tight stop loss. As with other algorithms, traders can implement it for scalping, day, and swing trading.
The key to trading the double top price action is to wait for confirmation before entering a trade. This confluence can come in the form of a candlestick closing below the valley between the two peaks. Once you have enough assurance, you can enter a short position with a stop loss just above the second or the first peak. The take profit can be set up at the previous bullish resistance.
Image 2 As soon as the market breaks the midpoint between two tops, our trader takes a sell trade with a risk-reward value of 1:1. Their take profit lies around the previous point of max price fluctuation.
Fortunately for beginner traders, Trading View has developed a double-top indicator that identifies the pattern and prints it on the chart with full automation. Novice investors can customize various built-in settings, such as setting up the price and the neckline. The EA is currently in beta, so it may be prone to bugs.
Image 3. A double-top pattern as observed using the TV indicator. It is vital to note that the EA is lagging and will only identify a respective after it has formed on the charts. For a better trade outcome, a manual analysis would be more fruitful.
Combining Double Top Patterns With Other Indicators
Combining one trading indicator with others that matches its techniques is a sure way to increase your overall gains. This is beneficial in improving your overall win rate and the risk-reward ratios. Let’s see how the double top pattern can go with other indicators.
Double Tops And Bearish Engulfing
Bearish engulfing patterns occur when a new red candle completely overtakes one full green bar behind it. This signifies that the market is changing, and bears are coming in control.
As a double top pattern is a price reversal indicator on the short side, it can work exceptionally well with the bearish engulfing pattern. Traders waiting to place a sell trade can wait for a bearish engulfing candlestick to form as the price crosses the valley between two tops.
Image 4. A slightly bearish engulfing pattern is highlighted in yellow. The red candle takes over the previous two green bars and closes a point below the opening of the first candle. The market falls with significant momentum shortly after that.
Double Tops And Fibonacci Intervals
Double top pattern formation can be clearly elaborated with the help of Fibonacci intervals. Let’s start with the first top. The pattern establishes when the bulls run out of gas, and the market faces a retracement. Using Fibs, we can see that the 1st peak can form at -27% or -61.8%.
Image 5. The Fibs mostly dictate the possible market retracement levels. Looking at the TV chart, we can see that the first double top formed at -27%.
The mid-valley is the result of market retracement, which again can be measured with the help of the Fibonacci indicator. It can form around 61.8%, 50%, and 38.2%.
We can continue to draw further peaks and observe their individual levels using Fibs.
|Fib Interval||Possible pattern||Support/Resistance|
|61.8%||Mid valley or second top||Medium|
Table 1. The Fib levels and the possible pattern formation on the charts. These levels indicate the zones where the market may reverse.
Double Tops And Moving Average Cross Over
Being a lagging indicator, moving averages can delay the oncoming bearish reversal. We can still, however, use them with the help of price action techniques. The idea involves waiting for the market to test the neckline zone between two tops after facing an initial sell-off. By this time, the 9 and 21 SMAs may already have experienced a cross-over, which confirms our short trade.
Image 6 The Fibs mostly dictate the possible market retracement levels. Looking at the TV chart, we can see that the first double top formed at -27%.
Double Tops And Divergence
RSI is an excellent indicator for identifying the possible areas of divergences. While the double top pattern is in the making, the RSI will make lower highs and lows point towards a bearish divergence. After you get enough confirmation, take a short trade as the price breaks the neckline.
Image 7. The bearish divergence in the RSI indicator has been plotted with the help of a red line. As the price breaks through the neckline of the double top pattern, we place a short trade marked by the red arrow. The market does not fall immediately and chooses to trend sideways before finally giving in to the selling pressure.
Double Tops And SAR
The stop and reversal indicator complements the double top pattern. It is commonly used by the general community to identify the possible points of change in the trend. The image below clarifies how the two algorithms can work head to head with each other.
Image 8. The SAR indicator prints a bearish signal when the market breaks through the midpoint between two double tops. Traders may stay in the trade until the SAR comes to the bottom, highlighting the end of the downtrend established by the double tops.
Using two or more indicators with the double top pattern is also possible. Keep in mind that your charts should be clean for easy market analysis. Overcomplicating trading by using various algorithms is a primary mistake of new traders.
Time Frame Analysis
The outlook of a double-top trading pattern can differ depending on the time frame you choose. For example, a double top on a 1-minute may be a single wick on the H4 chart.
Traders can use different time frames to their advantage as per their styles. E.g., a swing trader can work on the daily or weekly charts to spot double top patterns. A scalper can find opportunities on the M1 time frames.
Multi timeframe analysis can also help get additional confirmation on your trades. Use the following steps for a detailed approach:
- Identify a double top pattern on the H4 or H1 chart
- Draw the neckline
- Dive down to the lower time frames to spot the breaking point
- You can use bearish engulfing patterns or wait for the market to retrace to the neckline for placing a short trade
Do Double-Top Trading Patterns Work Each Time?
As mentioned before, it is common for beginner traders to look out for the get-rich-quick EAs. The double top trading pattern does have a good chance of a winning trade; however, there are times when you will incur losses.
While most professionals recommend trading with the trend, reversal patterns like double tops may be rare, but the potential for reward can be astonishing when they do show up. A trailing stop loss is a good way to ride the tide until the end. Some brokers allow TradingView integration so you can trade your portfolio directly from the charts.
Will Double Top Patterns Work Across All Types Of Instruments?
In general ‘yes’. The double top chart pattern can be spotted across all instruments, but the overall win rate can differ. A thorough analysis of historical data for each asset can provide you with the associated statistics.
Important Points To Note
Risk management is the process of identifying risks and putting measures in place to reduce the potential harm they can cause. It involves anticipating how different scenarios could play out and devising strategies for dealing with them without causing more problems than you solve. While trading with double tops, setting a proper stop loss and take profit for each position before your entry is vital.
Depending on your lot size and strategy, you can place the stop loss just above the double tops or slightly further. The take profit can be placed at the start of the previous uptrend or potential key level.
Remember that the double top indicator can only help you up to a certain point. It is your job as a trader to maintain a solid mindset while trading. Avoid feelings of euphoria, sadness, anger, etc., while scanning the charts.
Trading indicators are a valuable tool for any trader, whether you’re a novice just starting out or a seasoned pro. They can help you make better decisions about when to buy and sell and provide valuable insights into market trends. As algorithms take over the trading industry, it will become easier to spot double tops and trade them using expert advisors.