For decades, traders have forecasted future price movements using the technical analysis method, which is based on the analysis of chart patterns, bar patterns, and candlestick patterns. Before receiving a signal pattern technical analysis, the price moves through steps to complete the final formation. Whatever direction the market takes next, it will be bullish or bearish. These special Double Tops/Bottoms are created by the smart money to accumulate its own position size. With the fake breakout the smart money traps as much traders on the wrong side of the market as possible. The trapped traders are in panic and exit their position or even reverse their position.

• It is made up of two lows below a resistance level which – as with the double top pattern – is referred to as the neckline.
• To profit in this scenario, a trader would try to open a short position at the height of the second peak – before the pattern had been fully confirmed.
• This is because other traders would have also identified the pattern and have also placed positions while waiting for the market to shift in their favor.
• The pattern is completely created when the price breaks out of the support level (which horizontally crosses the central bottom) and goes down, creating a downtrend.

The double top pattern is prevalent in forex trading and can be a reliable indicator of a bearish reversal if identified correctly. However, like all trading patterns, it’s essential to use it in conjunction with other indicators and tools, ensuring more accurate predictions in the volatile forex market. The first method to trade a double top pattern is to go short when the price breaks through the neckline/support of the chart formation. Of course, a trader can also add indicators or charting tools to analyze price action around double tops and bottoms. Bollinger Bands are a popular tool which allows traders to analyze volatility easily.

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Again the stop loss is placed at a distance between one and one and a half-times the gap between the support/resistance. A lower stop can be used when you’re more confident of a reversal. You can use a support resistance indicator to help locate probable pivot lines.

• However, they can be extremely detrimental when they are interpreted incorrectly.
• Double top breakouts happen when the reversal fails and an upside breakout happens.
• In Figure 2, we sell at point (1) after the support line is broken.
• A double bottom pattern is a bullish formation that occurs when strong support prevents the continuation of a bearish trend on two consecutive occasions.
• Waiting for price to fall back below/above the level can, potentially, improve the quality of such signals.

A good entry point for traders to start short positions is the break of the neckline in a double-top formation. If the price does not break below the neckline, this provides a fixed level at which to enter the market and aids in determining the pattern’s invalidation. The height of the pattern can also be used to predict profit targets, giving traders a distinct moment at which to exit. In the graph below, the price has broken through the neckline, or support level, before reclaiming the top. This fake breakout could also be seen in double bottom patterns.

This is a great way to make profits with very less risk involved. The trend is confirmed when the bullish trend breaks through the neckline level and continues upwards. Many traders will seek to enter a long position at the second low.

A real double top, on the other hand, will indicate undeniably bearish conditions, signaling the potential steep drop in the price of a particular asset. It is not as easy to spot as one would think because there needs to be a confirmation with a break below support. While a double top is a bearish signal, a double bottom is a bearish signal. Top tops usually have an upswing, initial peak, trough, second peak, and neckline.

What Does a Double Bottom Tell You?

The first peak will come immediately after a strong bullish trend, and it will retrace to the neckline. Once it hits this level, the momentum will shift to bullish once again to form the second peak. The tops are peaks that are formed during an uptrend, when the price hits strong resistance, bounces down, and repeats this process, forming a double top.

What Does a Double Top Tell You?

The pattern on the chart is bearish and points to a possible trend change from an uptrend to a downtrend. As we see, the RSI was below 70 when the price reached its first and second peaks, followed by price reversals. In addition, the RSI was below 30 on the value line when the price broke the neckline, supporting the downside potential continuation and indicating a selling opportunity.

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Once you’ve found a strategy that consistently delivers positive results, it’s time to upgrade to a fully funded live account where you can apply your newfound edge. It will draw real-time zones that show you where the price is likely to test in the future. The chart below demonstrates when to place a sell order, a stop-loss, as well as when to take profits. The chart below demonstrates when to enter the market, place a stop-loss order, and take profits.

It consists of a peak in the middle of two almost equal-depth troughs that follow one another. The pattern indicates that the price found resistance at a particular level and was unable to break below it. The double-top and double-bottom patterns have the same pips between the profit target and the stop-loss point. Therefore, this pattern cannot be used to support tactics by traders seeking reward-to-risk ratios greater than one-to-one.

The signaling potency of the pattern may be further enhanced by this volume increase. Therefore, in some ways, a double top can be a more predictable, reliable pattern compared to other strategies. In many ways, a double top looks very similar to a double bottom with the exception of the peaks. A double top results in consecutive “highs”, while a double bottom results in consecutive “bottoms”. The5%ers let you trade the company’s capital, You get to take 50% of the profit, we cover the losses. Get your trading evaluated and become a Forex funded account trader.

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The pattern is completely created when the price breaks out of the support level (which horizontally crosses the central bottom) and goes down, creating a downtrend. In some cases, the fake double top pattern price can retest the support that has just been broken (new resistance). Remember, you should have some trading experience and knowledge before you decide to trade chart patterns.

It can be difficult to precisely specify the entry and departure locations or establish the pattern’s target levels because of this variability. A profit target can be established using a variety of techniques, including projecting the pattern’s height downward or locating probable support levels. This indicator draws the double tops/bottoms on the chart and gives alerts via Email, Push and via MT5-alert in the moment when a high probability double top/bottom entry signal is created. It’s less risky to place the sell order after the price has fallen below the neckline support. Together with the upper line this mean there are two resistances above the current price level that would have to break if the trend were to resume upwards. In the following chart, you can see the price is heading towards the 100 level, hitting 99.90 before sharply reversing.

Understanding the nuances of the double top pattern and implementing a strategic approach to trading it can significantly enhance your ability to identify profitable opportunities in the market. By incorporating these insights into your trading strategy, you can navigate the complexities of price action and make more informed decisions. In the context of a double top pattern, certain traders opt to sell when the price experiences a second dip, occurring shortly after the rebound and the formation of the second peak. While this approach carries higher risk, the potential reward is also greater. After an asset has reached a high price two times in a row with a small decrease in price in between the two highs, a double top has formed, which is a very negative technical reversal pattern.

Then, the price heads back up to almost exactly the same point – 99.88 – before again reversing sharply. When the two tops are so close, to the point of being nearly identical, this is a sign of a fake double top and that the highs will then be broken, as happened in this case. This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument.