How to trade using Double Top Pattern?

Today we are going to learn about Double Top Pattern

So for we have seen 4 different trading pattern and I hope you have liked it and understood better. This week let us learn about a bearish reversal pattern, which is Double Top pattern.

Different parts of Double Top pattern

There are three major parts which forms this pattern.

1. First Peak – Inverted V/U – The market does a pullback and forms an inverted V/U shape. At this point, there’s no way to tell if the market will reverse because a pullback occurs regularly in a trending market.
2. Second Peak– Inverted V/U – The price gets rejected at the same area, again. This is a first sign that the market could reverse lower. This forms the second inverted V/U shape
3. The trendline – This is the last line of defense for the buyers. If the price breaks below it, the market could reverse, head lower and begin the start of a downtrend.

Once you identify the double top formation, just draw a straight line in bottom which connects swing lows of the peaks. We will get a technical breakout when the price gives breakout below the line drawn.

Things to Remember,

1. If you spot a Double Top in a strong uptrend, chances are, the market will continue heading higher. So, the last thing you want to do is go short just because you spot a Double Top chart pattern. This is the biggest mistake traders make when trading the Double Top chart pattern
2. The space between the first and second peak should not be too close.
3. How do you know when a breakdown is going to be false so that you can avoid becoming one of the “trapped” traders?
   1. Firstly, if you see a strong power move into the trendline (which is support or the swing low) followed by a bullish price rejection, then there’s a good chance that the market might reverse from there.
   2. Secondly, if the higher timeframe is in an uptrend, then chances are, for that timeframe you’re on, the double top pattern will fail and the price will continue higher since the higher timeframe is in an uptrend.

Volume Factor on Handle part

As I always say, the volume is most important thing you need to check for technical breakout in any pattern. So a perfect double top pattern will give double confirmation when the price gives breakout to the downside with big volume.

Entry, Target and SL

You can enter into the trade once the price gives the breakout below the trend line or trendline drawn.

But if you are new trader, you can enter the trade during pullback to trendline.

If you are an experienced trader, you can even enter the trade once 50% of the 2^nd peak is formed and if you spot a candlestick reversal pattern.

The target for this pattern is arrived by measuring the height of the peak from trendline. So if the height of the peak is say 100 points then the technical target is 100 points from the breakout line or trendline.

When it comes to SL, Once the price is given a downside breakout below trendline, the trendline point becomes your immediate resistance and you can keep high price of the peak as your SL. But if there is build up or consolidation near the trendline, that can be used as SL directly.