Gateway To Prop Trading Success : The Double Top Pattern

When it comes to technical analysis, the double top pattern is one of the most basic and most popular technical analysis indicators that traders use to analyze price action. Due to its popularity it is also one of the most powerful technical tools used by traders. As a consequence of this, it is also one of the first tools a trader should learn. We at Funded Elite are all about bringing the advantage back into the hands of the trader and this article aims at talking all about the Double Top Pattern , how to identify it and how to successfully trade it.

The Double Top Pattern

 

Understanding the Double Top Pattern

When analysing the chart of a particular asset, a double top is said to have formed when an asset forms 2 peaks at nearly the same price level. In other words price rises to a price level and falls, rises again back to the same level and falls again.

This pattern is most commonly found at the end of an uptrend and it indicates that the asset is losing its upward momentum and a potential price reversal is imminent

 

Key Features of a Cup and Handle Pattern

To spot a double top pattern, traders should look out for the following characteristics:

  • Two Peaks: The pattern involves two noticeable peaks that are roughly at the same price level, with a noticeable dip (trough) between them.
  • Volume Behavior: As the price approaches the first peak, volume usually increases, then decreases as the second peak forms. A double top is considered more significant if the volume significantly drops during the second peak.
  • Neckline: The trough between the two peaks forms the neckline. Once the price breaks below this neckline, the double top pattern is confirmed, signaling a potential selling opportunity.

 

Trading the Double Top Pattern

Once price has broken below this neckline, the double top pattern is said to have finished forming and traders can look to short the market. A general rule of thumb is to measure the distance vertically from the neckline to the top of the peaks and project that price will fall an equal distance downward. Traders can look to exit their position when price hits this projected level.

An Important aspect of the double top pattern is the idea that price has lost the steam behind the upward momentum. This idea can be confirmed by the decline in volume when the second peak forms. When this condition is met and the price breaks below the neckline, traders can comfortably short the market.

 

The Importance of Context in Trading

Although the double top pattern is a powerful tool in technical analysis, traders should avoid relying on it in isolation. It’s crucial to confirm the pattern’s implications with additional forms of technical analysis such as the fibonacci retracement or moving averages to further strengthen the probability of the trade being successful. Additionally, market sentiments and broader economic factors should always be considered before executing a trade.

A careful consideration of all of these criteria and the proper and sensible implementation of the double top pattern when combined with other trading confluences can lead to drastic gains. There have been traders who have made their fortune primarily by following the bias proposed by the double top and double bottom patterns which also paying heed to the aforementioned considerations. 

 

Common Mistakes to Avoid

  • Ignoring Volume Trends: Failing to analyze volume alongside price action can lead to misleading conclusions about the strength of a double top. Always assess volume patterns when evaluating this chart formation.
  • Overtrading the Pattern: Not every double top formation leads to a significant reversal. It’s important to use additional confirmation methods before acting solely on this pattern.
  • Neglecting Risk Management: Sound risk management is essential. Traders should implement proper stop-loss strategies and ensure they adjust position sizes in line with their risk tolerance.

 

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