Rounding tops and bottoms that follow each other provide double top and bottom patterns. The formation of this pattern is completed when the prices move back to the neckline after forming the second low. When the prices break through the neckline or the resistance level then the bullish trend reversal is confirmed and traders can enter a long position.

Double Top: Trading Examples

Following this peak, Bitcoin encountered a substantial sell-off, partly due to profit-taking and heightened regulatory concerns in various countries. The price found support around $47,000, creating a trough between the two peaks. This price decline was a normal retracement that often occurs after a significant price increase.

Common Mistakes When Trading Double Tops

1. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors.
2. Rounding tops and bottoms that follow each other provide double top and bottom patterns.
3. This euphoria, however, can quickly turn to caution as sudden market drops pose challenging scenarios, forcing traders to reassess their positions.
4. You estimate the profit target by measuring the height of the pattern and projecting it downwards from the neckline.
5. It is formed at the end of an uptrend and indicates a potential downward reversal, which is why it is considered a bearish reversal pattern.
6. The double top pattern market psychology indicates a shift from bullish optimism in market securities to increasing bearish sentiment.

Once you have identified this chart pattern in the stocks, you can trade accordingly, as discussed above. Double Top resembles the M pattern and indicates a bearish reversal whereas Double Bottom resembles the W pattern and indicates a bullish reversal. We have a basic stock trading course, swing trading course, 2 day trading courses, 2 options courses, 2 candlesticks courses, and broker courses to help you get started. We don’t care what your motivation is to get training in the stock market. If it’s money and wealth for material things, money to travel and build memories, or paying for your child’s education, it’s all good.

Is a Double Top Pattern Profitable?

For that reason, below we’ll show you two examples where the double top pattern can be found. Unlike trading a double top, where traders take a short position, after a double bottom, traders would typically take long positions that will profit from the rising price. The double top patterns accuracy rate is 38% from our data of 1,044 of these chart pattern formations. The double top pattern drawing involves identifying two equal height resistance points and plotting the number 1 and 2 above them. Then, draw a horizontal support trend line from left to right connecting the pattern’s troughs (low points) together that marks the pattern support zone. A double top pattern forms on all timeframes from intraday 1-second charts up to a yearly chart period.

We teach day trading stocks, options or futures, as well as swing trading. Our live streams are a great way to learn in a real-world environment, without the pressure and noise of trying to do it all yourself or listening to “Talking Heads” on social media or tv. Notice how a blue bullish candlestick moved up to create the second peak, followed by a bearish candlestick that created a lower high.

In this scenario, we would have waited for the market to break the neckline and then retest the level as new resistance. Notice in the illustration above how the market retests the neckline as new resistance. double top pattern rules Up to this point, we have discussed the dynamics behind the double top pattern as well as its characteristics. A true sign of a proper stop is a capacity to protect the trader from runaway losses.

Which approach you chose is more a function of your personality than relative merit. If these levels undergo and repel attacks, they instill even more confidence in the traders who’ve defended the barrier and, as such, are likely to generate strong profitable countermoves. This depends on multiple factors and variables, but is as accurate if not more than any other chart pattern or technical indicator. During the second higher peak, your trade will close if you set your stop loss at the neckline – which is the best-case scenario. If you go short without stop loss, on the other hand, your losses can quickly multiply as the price rises to the second peak. This article will help you recognize and use the double top pattern to optimise your returns from your trading and investing activities.

If you do not understand the risks involved, or if you have any questions regarding the PrimeXBT products, you should seek independent financial and/or legal advice if necessary. The magnitude of the drop is usually the same distance between the drop and the second peak. You’ll notice that the top red line and green line are support and resistance levels as the double top is developing. In summary the double top pattern is commanding if correctly utilized and understood. Proper support from other technical tools enhance the characteristics of the pattern to allow traders to implement this in various markets.

Double top patterns are considered a “bearish reversal pattern,” i.e. a pattern created before a downward reversal after an upward trend. There are several options that traders can consider before entering the market. They can sell just after the breakout occurs; this is at the double top breakout candlestick. Additionally, they can wait for at least two candles to be formed in the breakout direction. This serves as the threshold that signals whether a trend reversal is occurring. A trader draws a horizontal line through it and waits for the price to fall below it after the second high is formed.

Double top patterns are noteworthy technical trading structures to learn and integrate into a trader’s arsenal. Double tops can enhance technical analysis when trading both forex or stocks, making the pattern highly versatile in nature. As with any other chart patterns used in technical analysis, a double top pattern is not guaranteed to succeed and is always up for individual interpretation. The double top pattern market psychology indicates a shift from bullish optimism in market securities to increasing bearish sentiment. As prices consolidates forming the two swing high points, there is uncertainty among traders. A double top pattern entry point is set when the price moves below the support line of the pattern.