Double Top Reversal Chart Pattern

We continue the series of articles on best known chart patterns in financial markets. Last time I wrote on head and shoulders (don’t forget to read that one). May I remind you that these patterns are usually placed under two categories: continuation and reversal. It would be best for us to look at reversal category first and then go on to continuation patterns. So, let’s talk about double top today.

It is a bearish reversal pattern that is often found at the end of a bullish trend and when validated it often results in a big downtrend. This technical structure consists of two peaks that are relatively equal in terms of place they form.

So, firstly, there has to be a bullish move before the pattern forms. At some point price reaches important resistance level and starts going down rapidly. After some time price reaches important support level; which entices bullish traders to step in and continue buying. Price rallies back to previous top and fails to break it convincingly. In most situations this top will be slightly lower than the first one, in other situations price can break previous top by some 3-15 pips and then a sharp reversal will take place. When that happens we can be sure that the second top is in place.

Price will start falling again till previous support level where it stopped and rallied to form the second top. It may linger there for a while, but double top pattern is really validated when price breaks lower through that support and continues going down.

How do you trade it?

One of the best ways to trade the pattern is to place a sell stop order below the first support level where price came and then rallied to form the second peak. You may wait for the level to be hit second time, retrace a little and then if it starts coming down again, place a sell stop order below the support with a stop loss order above the most recent resistance. When the support is broken, pattern is validated and you should be in the game of selling.

Where to take profit?

We need to have a minimum target. You can do that by calculating the distance from the peak to the support and adding it to the breakout level. If the distance is 500 pips, this is the distance you expect price to go from breakout level downwards.

As the picture is worth a thousand words I have attached a weekly chart of eur/usd with a double top pattern. When it was confirmed after support was broken price went down more than 3000 pips before reversing. The minimum target for the move was measured to be 750 pips. You could have taken that easily and many more had you traded with a few positions.

double top pattern