The first thing you need to know is that the initial breakout is not what triggers the trade setup. There are other ways of confirming patterns though, and using more than one at once will strengthen your risk management. Especially if it’s in the same direction as the higher timeframe trend.

bullish reversal

This is the reason why we need to allow a maximum of 10 pips variation between the two tops. Beginner Forex book will guide you through the world of trading. U have opened my eyes to see that I’m on the part to be a successful and great trader.

Spotting the double top pattern

Here, we explain double tops and double bottoms including what they tell traders and how to trade using them. Double tops and bottoms are chart patterns that signify a reversal from the prevailing trend. A double top has an “M” shape and indicates a bearish reversal in trend, while a double bottom has a “W” shape and is a signal for a bullish price movement. Triple top and triple bottom patterns form slightly differently to double tops and bottoms. These patterns complete when the price moves below the pullback lows or above the rally highs . The double bottom is a bullish reversal pattern because it typically signifies the end of selling pressure and a shift towards an uptrend.

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  • Because of this, traders should always use the double top and double bottom chart patterns alongside others to confirm the trend before opening a position.
  • Jesse Livermore, one of the greatest traders to ever live, said that the big money is always made at these big turning points when the trend changes direction.
  • Many traders will seek to enter a long position at the second low.

For the Double Bottom, you would open a long or bullish trade. If the price action closes a candle above the Neck Line, we confirm the validity of the formation. If the price action closes a candle below the Neck Line, we confirm the validity of the formation. Place a sell stop order just 3-5 pips under the low of the bearish reversal candlestick formation. Therefore, setting small stops keeps losses small and avoids losses of capital. If you minimize losses, you can find the next profitable trading opportunity.

Now, there’s buying pressure, but it’s too early to tell if the market could continue higher. What they think is a reversal pattern could just be consolidation. That said, there is another way to estimate the potential move of a market after the formation of a double top.

After all, two standard deviations cover 95% of possible scenarios in a normal distribution of a data Classic statistical assumptions are not very useful for traders. Therefore setting a wider standard-deviation parameter is a must.

The double top trading strategy

This is when you use it in combination with other trading indicators. Using trading indicators help you to reduce the likelihood of a false breakout. An approach I use a lot is to combine the double top strategy with a double exponential moving average .

But they’re still important to know if you’re interested in identifying and trading trends. A chart pattern is a set price action that is repeated again and again. The idea behind chart pattern analysis is that by knowing what happened after a pattern in the past, you can take an educated guess as to what might happen when it appears again. One request…Though technical analysis applies across markets..

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Both the double top and triple top are toppings patterns, so when the pattern «completes» consider exiting longpositions and focus on taking short positions. Double and triple tops are bearish patterns, so they work best for exiting long positions or entering short positions. Aspects of fundamental analysis​​ can have a dramatic effect on the share price, which may overshadow the double top or bottom pattern. This includes earnings reports and changes to company structure. For example, a double bottom may form on a price chart, making a stock look enticing to trade. If a poor earnings report comes out, the price may plummet, despite the double bottom pattern.

support level

Remember, we need the right context and everything needs to line up for a good double top reversal. In the second phase, the price moves back upward towards the resistance created early by the first peak. But it fails to break it and instead falls down to the neckline again. I accept FBS Agreement conditions and Privacy policy and accept all risks inherent with trading operations on the world financial markets.

Worst case scenario Monday its going to drop off for a nice money… If you draw a trendline between the two retracement lows on a triple top pattern, when the price drops below that trendline it can also be used as an entry point. This is only useful if the second retracement is a bit higher than the first. If the second retracement low is way above the low of the first, or below the first, the trendline will be awkwardly angled and thus not useful.

Their inability to extend this bullish series initiates the creation of the double top pattern as the second peak is not registered as a higher high, but rather as an equal high. This weakness is then used by the sellers to push the price action lower and erase previous gains. A double top or double bottom can tell traders about a possible trend reversal. Double tops and bottoms are important technical analysis patterns used by traders.

  • The tops or peaks or swing highs are formed when price hits a certain resistance levels where it cannot break it to the upside.
  • A simple horizontal trend line is drawn through the lowest point of the pullback.
  • When you trade the Double Bottom, you must pay attention to the time and space between the lows — the larger the “gap”, the better.
  • With BTC struggling to top that all important local higher I could see a…

Downtrends make lower swing lows, which is what a double top pattern requires. 5 March 2023 Technical Analysis Gold finally breaks its downtrend. The downtrend from February finally broke last week when gold prices rose above the 10-day moving average. A trailing stop allows you to set a large target and helps prevent unrealized profits from turning into losses.

The low point of the retracement between the two peaks is marked with a horizontal line. This line, when extended out to the right, is useful for trading and analyzing the double topping market. Traders can use the size of the initial pullback from the top as a guide for setting profit targets. Learn more about support and resistance​​ levels in trading.

The price action moves higher in an almost vertical manner, without any meaningful pullback. Following the first peak, the price action rotates lower in the first more significant pullback. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate. 75% of retail client accounts lose money when trading CFDs, with this investment provider. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

By the time you finish with this lesson, you will know exactly how to identify a double top as well as how to enter and exit the pattern to maximize profits. The final step is choosing a profit target from your position. Not only does this help you decide where to place your take profit order, but it also enables you to calculate your risk-reward ratio for the opportunity. In our bull flag, for instance, you might set your stop loss close to the pattern’s support line. In a rounded top, the buying sentiment is still gaining ground at the beginning – as evidenced by the higher highs hit by the market. But then, a series of lower highs offers a strong signal that sellers are beginning to take control.

However, unless the neckline has been broken, they are mistaken. The distance from the double top resistance level to the neckline, in this case, is 270 pips. Therefore we would measure an additional 270 pips beyond the neckline to find a possible target. Here we have a double top that formed on the EURUSD daily chart.

You may want to test the environment with virtual double top forex with a Demo account. Once you are ready, enter the real market and trade to succeed. Well, many traders buy the break of the neckline after a Double Bottom is formed. Besides, I don’t know too many traders who will complain about booking 270 pips of profit.

GBP/USD Forex Signal: Bears Eye the Double-Top Neckline –

GBP/USD Forex Signal: Bears Eye the Double-Top Neckline.

Posted: Tue, 07 Feb 2023 08:00:00 GMT [source]

He is the most followed trader in Singapore with more than 100,000 traders reading his blog every month… You never know whether a breakout is false or not that’s why you have a stop loss in place. So, if you want to take advantage of the move, consider trailing your stop loss and ride the momentum for all it’s worth. When you’re trading this strategy, you’re likely to be trading against the long-term trend.


Therefore, when the market forms a double top, close out long positions before prices fall. You can also take a short position to profit from the market’s decline. The second step of the Double Top chart pattern strategy is to find what we call the historical precedent or a chart pattern.

The distance from the broken level of the pattern to a future point in the market. Let’s revisit our EURUSD pattern to see if we can identify a favorable point of entry. This ensures a favorable risk to reward ratio, which is an essential ingredient if you wish to succeed in this business over the long-term. For this reason, I tend not to separate the two, but I do like to see a well-defined M or W from the patterns I trade. As you can see from the diagram above, the market made an extended move higher but was quickly rejected by resistance . However, there’s no such thing as an infallible pattern – they can all fail.