“Double Top” Patterns occur when prices fail to make new highs at significant previous high levels. “Double top” patterns are relatively reliable and easy to trade. Also, these patterns fail as they may potentially form “triple” or “multiple” top formations. “Double tops” usually signal the end of a bull run, depending on the width of the top formation. Volume in the first swing should be heavier than the volume on the second swing. In addition, the volume maybe heavier on the breakdown bars. If the breakdown volume is weaker, it may be signaling a “triple” or “multiple” top formation.
Trade: A “Double top” pattern confirmation occurs at the breakdown level of “swing lows” at neckline. Enter a “short” trade below the previous “swing low” at neckline.
Target: “Double Top” patterns do offer a good risk/reward ratio. Measure the distance between the top of the pattern to the neckline for potential target range from the trade entry.
Stop: “Double tops” also fail and form “triple” or “multiple” top patterns. Usually the “Double top” pattern failure occurs when prices reverse and trade at the middle of the “Double top” pattern. Enter a “stop” order at the middle of the pattern range to protect the trade.
Trading Double Top Pattern
Trading Double Top Pattern
The example above illustrates a “Double top” formation from the EBay daily chart. EBay formed a “Double top” pattern from November 2006 to January 2007 around $47 level. Late January 2007, EBay started to decline from the “Double top” level and closed below $42. This close below neckline signaled a potential “short” trade. The depth of the “Double top” is $5.
- Enter a “short” trade below the “low” of the breakdown bar at $42.50.
- Protect with a “stop” order at the middle of the channel at $45
- Place a “target” at the depth of the “Double top” pattern below the breakdown level to $37.50.
Trading Double Top Pattern
Trading Double Top Pattern
The example above illustrates a “Double top” formation from the Russell Emini 61 0 (ER2) tick chart. ER2 formed a “Double top” pattern on April 3,2007 near the 8 19.5 level. The next day, ER2 started to decline from the “Double top” level and closed below the “swing low” of 8 16.5. Price closing below the neckline signaled a potential “short” trade. The depth of the “Double top” is 2.5 points.
- Enter a “short” trade below the “low” of the breakdown bar at 816.5.
- Place a “stop” order at middle of the “Double Top” channel at 818.5
- Place a “target” at the depth of the “Double top” pattern below the breakdown level to 8 14.