how to trade a double top
there are three primary ways to trade a double top first you can wait for the price to cross below the neckline which would confirm the double top pattern and perhaps signal a trend reversal you can start a short trade or sell position after the break happens to reduce risk think about placing a stop loss order above the most recent swing high you can also project the vertical distance between the neckline and the highest peak downward from the neckline to determine your profit target second after the neckline is broken the price may occasionally retest it from below before continuing its downward movement as part of this technique you watch for a price break below the neckline wait for a retreat to the neckline and then search for a bearish confirmation signal such as a bearish candlestick pattern a trendline break or a lower high to place a short trade a profit target can be established using a variety of techniques including projecting the pattern s height downward or locating probable support levels the stop loss can be set above the most recent swing high third you can use extra technical indicators or oscillators to make the double top pattern more reliable for instance you can check for bearish divergence on the moving average convergence divergence macd histogram or the relative strength index rsi when the indicators display lower highs as the price develops the two peaks following the stop loss and profit target criteria described above you can place a short trade once the neckline is broken when the indicators confirm the bearish signal advantages and disadvantages of a double topa double top pattern is a visual cue of a possible change in trend from an uptrend to a downtrend for traders hoping to profit from a shift in the market s trajectory and seize fresh profit possibilities this can be favorable plus there s often a definite resistance level that is formed when two peaks at roughly the same price level appear consecutively this level can be used by traders as a benchmark for establishing stop loss orders and profit objectives improving risk management and trade planning 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 volume analysis can offer more assurance of the correctness of the pattern volume frequently rises when the price breaks below the neckline and decreases throughout the creation of the two peaks 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 last by spotting a double top pattern traders can determine their profit goals and determine the probable downside target depending on the pattern s height due to the fact that the potential profit goal is often higher than the original risk stop loss this usually provides a good risk reward ratio the double top pattern is not infallible like any other chart pattern it occasionally generates false signals a failed double top pattern could develop if the price briefly forms two peaks before continuing its upward trajectory the breach of the neckline and other supportive signs should serve as confirmation therefore traders should proceed with caution there may be some subjectivity involved in recognizing a double top pattern the positions of the peaks and troughs as well as how symmetrical the pattern ought to be may be interpreted differently by traders this subjectivity may cause discrepancies and a range of outcomes among traders it s possible that not all double top patterns have exact symmetry or the same peaks and troughs the pricing ranges length of time and shape of the design are all flexible it can be difficult to precisely specify the entry and departure locations or establish the pattern s target levels because of this variability a double top pattern s downside goal is normally calculated by extrapolating the pattern s height from the neckline however relative to the starting risk or stop loss level the possible profit target can be constrained depending on the state of the market the price can not always reach the predicted target producing lower earnings than expected allows traders to use visual patterns to trademay indicate clear resistance levelsmay communicate clear entry and exit pointsmay be confirmed by the volume of shares tradedlike any chart pattern it may indicate a false signalmay rely on subjectivity in identifying patternsmay result in slightly different variations across investmentsmay result in limited profit potential