A double top is a chart pattern that signals the end of an uptrend. Therefore, when the market forms a double top, close out long positions (buy) before prices fall. You can also take a short position (sell) to profit from the market's decline.
The double top pattern can be a profitable price action pattern. When an uptrend reverses, the market can fall rapidly and significantly, providing an opportunity to profit.
A double top pattern forms when the price reaches two equal highs and then falls below the low between the two highs. From this chart, we can see that a double top signals a price decline.
Double top entry tips
Use a moving average
When trading with a double top, moving averages are helpful for trade timing. There are two types of moving average patterns for this purpose. One strategy is to sell near the falling moving average, and another is selling the second break below the moving average. The moving averages confirm a double top pattern, increasing your chances of making a profit.
Enter before breaking the low
The double top is a popular pattern. Many traders try to sell when the price breaks below the low. A more advanced strategy is to enter before the price breaks below the low price, as few traders want to buy when prices are falling toward support. For higher profits, it can be advantageous to enter the market just before a break below the low.
Look for strong up trends
When a strong uptrend appears in a market, it does not appear to end. No uptrend can continue to rise forever. When a strong uptrend ends, the market may reverse significantly as many traders close their positions. Instead of being intimidated by a strong uptrend, see it as an opportunity to sell and use the double top pattern to make a profit.
Double top exit tips
Prices may stop falling when they reach support. One way to maximize profits is to lock in profits once prices touch support and reverses higher. The support level can be at a previous low or previous resistance, a long-term moving average, a trend line, or a major breakout (for example, USDJPY 135.00, Gold $1,500, or Dow 30 34000).
When a trend ends, a percentage reversal calculation is helpful to find support. Popular reversal percentages are 33%, 50%, and 67%. For example, if the market rises 100 pips from 133.00 to 134.00, there is support at 133.67, 133.50, and 133.33. Fibonacci levels can improve target setting.
Use a small stop
It is difficult to predict the end of an uptrend. Therefore, setting small stops keeps losses small and avoids losses of capital. If you minimize losses, you can find the next profitable trading opportunity. By focusing on small stops and large targets, you can achieve a total profit even if your win rate is less than 50%.
Use a trailing stop
A trailing stop is where the stop size reduces as the position makes a profit. In other words, when trading a double top pattern, the stop loss size is reduced and narrowed as the price declines. If you sell USDJPY at 135.00, set your stop at 135.15, the price drops to 134.75, and your stop loss will also fall to 135.00.
A trailing stop allows you to set a large target and helps prevent unrealized profits from turning into losses. When trading in a double top pattern, it can be hard to decide on the correct target because you do not know how far the market will fall. Thus, some traders use trailing stops to close positions instead of setting targets.