Step #1: Identify the Phase of the Market. The Double Top reversal needs an uptrend.
Just because you can spot the double top reversal it doesn’t mean you have to jump in willy-nilly. Remember, we need the right context and everything needs to line up for a good double top reversal.
So, the first step is to identify the phase or the market condition. At any given moment the market can be trading either up, or down, or it can go sideways. As we previously established the Double Top reversal needs a prior uptrend.
Since this is a reversal trading strategy, we first need a prior trend. Otherwise, we end up trading just a ranging market. This is something we want to avoid, particularly if we trade the Double Top reversal pattern.
Step #2: The historical precedent. An A++ Double Top Reversal is composed of 2 Rounded Tops
The second step of the Double Top chart pattern strategy is to find what we call the historical precedent or a chart pattern. We don’t want to make a trading decision without price confirmation and in our case we use the double top reversal pattern.
You need to identify two rounded tops in order for the double top breakout to be considered tradable.
But, what is a rounded top?
In technical analysis, a rounded top is simply a price formation that typically occurs after an uptrend, prices move upward and then quickly roll back downwards creating a dome or sometimes an inverted “V.”
Now, of course, that depending on the double top reversal structure the inverted V top will vary in size and magnitude. But the idea is that we need a quick move up followed by a quick move down to define a rounded top.
Note* A valid double top reversal has two rounded tops
Let’s move forward to the third criteria of our double top chart pattern strategy.
Step #3: Allow a maximum 10 pips variation between the two tops.
Don’t seek perfection, because in trading you need to get rid of your idealistic mindset as the double top reversal will not look perfect all the time, so be flexible.
This is the reason why we need to allow a maximum of 10 pips variation between the two tops.
The probability of two tops happening at the same exact price level is almost impossible. You’ll often find that the two tops have slight variations, but they happen near the same price zone. What is more important is the closing price, which can align perfectly if the location of the double top pattern is good.
So far, so good.
Now we to determine an entry technique for our Double Top chart pattern strategy.
See below:
Step #4: Sell when Double Top breakout candle closes below the neckline.
After we identify the phase of the market, and the characteristics of a good double top reversal we need to wait for confirmation that momentum is shifting.
The Double Top breakout candle is our signal that the momentum has shifted and it’s what it confirms and validates the double top pattern.
You’ll see the double top breakout happen over and over again, but it’s important to analyze them within the context of the market trend.
The next logical thing we need to establish for the Double top chart pattern strategy is where to take profits.
See below…
Step #5: Take Profit equals 2, 3 x times the distance in price as measured from the highest peak to the Neckline
The minimum profit target for the double top pattern is approximately equal to 2 or 3 x times the distance in price as measured from the double top to the neckline.
If we project the same price distance 2 or 3 times more to the downside we obtain our first take profit zone for the Double Top chart pattern strategy.
The double top pattern can produce a major reversal so we advise you to be very flexible with your profit target not to miss any big profit opportunity.
The next important thing we need to establish is where to place your protective stop loss.
See below…
Step #6: Place the protective stop loss slightly above the resistance created by the Double Top reversal
The Double Top chart pattern strategy gives you a simple way to quantify risk because you can place your protective stop loss slightly above the double top pattern
The double top pattern really gives you the opportunity to also trade with a tight stop loss, which is great as we always want to keep losses at minimum.
Note*** The above was an example of a SELL trade… Use the same rules – but in reverse – for a BUY trade, but this time we’re going to use the double bottom pattern.
Just because you can spot the double top reversal it doesn’t mean you have to jump in willy-nilly. Remember, we need the right context and everything needs to line up for a good double top reversal.
So, the first step is to identify the phase or the market condition. At any given moment the market can be trading either up, or down, or it can go sideways. As we previously established the Double Top reversal needs a prior uptrend.
Since this is a reversal trading strategy, we first need a prior trend. Otherwise, we end up trading just a ranging market. This is something we want to avoid, particularly if we trade the Double Top reversal pattern.
Step #2: The historical precedent. An A++ Double Top Reversal is composed of 2 Rounded Tops
The second step of the Double Top chart pattern strategy is to find what we call the historical precedent or a chart pattern. We don’t want to make a trading decision without price confirmation and in our case we use the double top reversal pattern.
You need to identify two rounded tops in order for the double top breakout to be considered tradable.
But, what is a rounded top?
In technical analysis, a rounded top is simply a price formation that typically occurs after an uptrend, prices move upward and then quickly roll back downwards creating a dome or sometimes an inverted “V.”
Now, of course, that depending on the double top reversal structure the inverted V top will vary in size and magnitude. But the idea is that we need a quick move up followed by a quick move down to define a rounded top.
Note* A valid double top reversal has two rounded tops
Let’s move forward to the third criteria of our double top chart pattern strategy.
Step #3: Allow a maximum 10 pips variation between the two tops.
Don’t seek perfection, because in trading you need to get rid of your idealistic mindset as the double top reversal will not look perfect all the time, so be flexible.
This is the reason why we need to allow a maximum of 10 pips variation between the two tops.
The probability of two tops happening at the same exact price level is almost impossible. You’ll often find that the two tops have slight variations, but they happen near the same price zone. What is more important is the closing price, which can align perfectly if the location of the double top pattern is good.
So far, so good.
Now we to determine an entry technique for our Double Top chart pattern strategy.
See below:
Step #4: Sell when Double Top breakout candle closes below the neckline.
After we identify the phase of the market, and the characteristics of a good double top reversal we need to wait for confirmation that momentum is shifting.
The Double Top breakout candle is our signal that the momentum has shifted and it’s what it confirms and validates the double top pattern.
You’ll see the double top breakout happen over and over again, but it’s important to analyze them within the context of the market trend.
The next logical thing we need to establish for the Double top chart pattern strategy is where to take profits.
See below…
Step #5: Take Profit equals 2, 3 x times the distance in price as measured from the highest peak to the Neckline
The minimum profit target for the double top pattern is approximately equal to 2 or 3 x times the distance in price as measured from the double top to the neckline.
If we project the same price distance 2 or 3 times more to the downside we obtain our first take profit zone for the Double Top chart pattern strategy.
The double top pattern can produce a major reversal so we advise you to be very flexible with your profit target not to miss any big profit opportunity.
The next important thing we need to establish is where to place your protective stop loss.
See below…
Step #6: Place the protective stop loss slightly above the resistance created by the Double Top reversal
The Double Top chart pattern strategy gives you a simple way to quantify risk because you can place your protective stop loss slightly above the double top pattern
The double top pattern really gives you the opportunity to also trade with a tight stop loss, which is great as we always want to keep losses at minimum.
Note*** The above was an example of a SELL trade… Use the same rules – but in reverse – for a BUY trade, but this time we’re going to use the double bottom pattern.
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