HOW TO TRADE DOUBLE TOP CHART PATTERN

How to trade double top chart pattern
Infographic - How to trade double top chart pattern

Entry: after breaking the pattern's lower border at point (4), either with an entry after the breakout, or after a possible retest of the lower border.

Take profit: identified by measuring the vertical distance between the pattern's upper and lower borders, that measurement is then applied from the breakout rate (4)

Stop loss: the pattern's lower border, which is identified by point (2)

DOUBLE TOP PRICE ACTION

This chart pattern starts forming with bulls already in control of the exchange rate's uptrend. Bears make a stand at a certain rate that will be tested exactly twice before they are finally able to reverse direction, and the exchange rate starts a downtrend.

Let's break down the pattern formation!

In an uptrend, price action finds the first resistance (1), which will be the horizontal resistance for the rest of the pattern formation.

Price action reverses direction from the first resistance (1) and goes downwards till it finds support (2), which will be the only low in the pattern.

Price action reverses direction from support (2) and goes upwards, till it finds the second resistance (3), which will be around the same rate of the first resistance (1)

The pattern is completed when price action reverses direction from the second resistance (3) and goes downwards till it breaks the pattern's lower border at point (4)

NOTES ON DOUBLE TOP

Direction

Reversal

Type

Bearish

Occurrence

High

Common term

All

Pip distance of the trend prior to the pattern formation should be noticeably longer than the pattern formation itself.

After the breakout, retesting the pattern's lower border, which was a resistance that turned to support, is highly possible.

Volume is usually high when reversing from the second resistance (3), as well as when breaking the pattern's lower border.

This pattern is commonly found on all time frames.

DOUBLE TOP REWARD:RISK

R:R depends on the (lower border-entry rate) distance, compared to (upper border-lower border) distance.

Always remember that the stop loss level explained above is absolute, the actual stop loss rate for your trade setup should be a bit beyond those levels to give the trade setup some room to breathe, and of course, calculations for position size and R:R should be done with respect to that rate.

DOUBLE TOP REAL TRADE

Double top real trading example
Forex chart - Double top real trading example, as found on the D1 chart of EUR/USD using FXCM's MT4 platform

PRE-BREAKOUT CALCULATIONS

Since a double top chart pattern can be spotted after the reversal from point (3), you can save yourself precious time by doing the following set of calculations before the breakout, since they don't rely on the trade's entry rate.

Note: identifying the pattern's upper border rate is subjective since the rates of points (1) and (3) won't be exactly the same. We prefer choosing the point with the lower rate to keep the pattern compact, which in this trade is point (1)

  • Pattern length (point (1) rate - point (2) rate)
    • (1.39657 - 1.36716) * 10000 = 294.1 pips
  • Take profit rate (breakout rate - pattern length)
    • 1.36716 - (294.1 / 10000) = 1.33775
  • Stop loss rate (breakout rate + 25% of pattern length)
    • 1.36716 + ((25 * 294.1 / 100) / 10000) = 1.37451

TRADE SETUP

Choosing when to enter the trade after the pattern's lower border breakout is always left to your best judgement. In this trade, we chose to enter the market at the closing rate of the candle right after the candle that broke the lower border, to ensure that the breakout was real, not a fakeout.

  • Trade entry rate
    • At the closing rate of the candle right after the candle that broke the lower border at point (4): 1.36311
  • Take profit in pips (entry rate - take profit rate)
    • (1.36311 - 1.33775) * 10000 = 253.6 pips
  • Stop loss in pips (stop loss rate - entry rate)
    • (1.37451 - 1.36311) * 10000 = 114.0 pips
  • Stop loss R:R (take profit in pips / stop loss in pips)
    • 253.6 / 114.0 = 2.225

Currency pair

EUR/USD

Timeframe

D1

Breakout

22-May-2014

Platform

MT4

Broker

FXCM