The double top pattern is one of the most popular and reliable patterns in technical analysis. It is also known as the M pattern. Traders use it to detect potential trend reversals, typically from bullish to bearish markets.
The pattern itself is relatively easy to identify and, if properly understood, can become a valuable tool in your trading strategy.
This post will walk you through everything you need to know about trading double top pattern on trading charts.
Also, in this blog post, we will discuss the most advanced method of trading double top pattern on the trading chart. This is an advanced method of earlier double top pattern trading.
In the traditional double top pattern trading method traders take entry after break down of the neckline. However, in the advanced method, traders can take entry at the second top and book the first target at the neckline, where other traders take entry. This method puts traders one step ahead of fellow traders, which is most important factor to earn profits in trading.
So, if traders use this method with chart reading, and follow all rules then it helps them in a profitable trading journey.
What is a Double Top Pattern?
A double top is a bearish reversal pattern, indicating the possibility of a price decline following an uptrend. This pattern is formed after a sustained uptrend or one-sided up move which is also known as a power move. Where the price peaks, drops to a certain level, rises again to roughly the same peak, and then declines again.
Key Features of Double Top:
- Two peaks: Price makes two highs (peaks) at approximately the same level.
- Valley between Peaks: Price falls between two peaks, forming a “valley”.
- Neckline: The lowest point between the two peaks is called the neckline, which acts as a support level. In the earlier double top pattern trading method, when the price breaks below this level, it confirms the double top pattern.
How to Recognize Double Top Pattern?
To trade the double top pattern effectively, you must first be able to spot it on the chart. Here’s a step-by-step guide to identifying them:
- Find an uptrend: A double top pattern follows an uptrend or one-sided up move (Power Move or parabolic move), so the price should be in an uptrend before the pattern is formed.
- Find the top first: Price will reach a high and then pull back, generally from strong resistance. This first peak marks the beginning of the pattern.
- Identify the pullback: After the first peak, the price should turn lower again. This pullback should not be too deep; It usually returns to the support level (neckline).
- Watch for the second peak: The price will rise again to roughly the same level as the first peak. However, the second peak often struggles to break the first peak, weakening the upward momentum.
- Look for an entry in three magic lines: After the formation of the neckline, draw the three magic lines as given below,
I) The First line must be high of the first peak.
II) The Second line must be the multiplication of the first peak high value and 0.001 with subtraction of the multiplicated value and first peak high value.
III) The third line is the exact middle line of the first and second lines.
Example,
If you are in the Nifty 50 Index, the first peak level value is 24878.90. The three lines are as follows,
24878.90X0.001= 24.878,
First line – 24878.90
Second line – 24878.90-24.878=24854.02
Third line – Exact middle line of the above two lines.
A step-by-step guide to trade the double top pattern with an advanced method
Now that you know how to recognize a double top pattern, let’s see how you can trade it successfully.
Step 1: Wait for the sample to be fully prepared
The most important rule for trading a double-top pattern is to wait for the pattern to fully form. This means the price must reach the middle line in the second top.
There are two methods for entry here as follows,
1) Aggressive Entry – When a trader takes an entry without closing of the red candle in the entry zone then it is an aggressive entry. Most of the time traders take this type of entry with limit order.
2) Confirm Entry – When traders take entry after the closing of the red candle in the entry zone then it is known as confirm entry. This is a more secure trade than aggressive entry. But in aggressive entry, SL is very low and the risk-reward ratio is better than confirmed entry.
Step 2: Set the stop loss
Stop loss is the most important phenomenon in trading. No one is 100% right in the market. So traders have to set stop loss after entry or with a limit order while taking entry. Which saves traders capital from big losses. Especially in this type of double-top stop loss not more than high of the first peak.
Step 3: Determine your profit target
Book your first target at neck line, where other traders take entry. After that reduce your stop loss and trail your trade. Trailing stoploss is a best method to book big profits. Book the remaining quantity as per market structure or as per support levels.
Mandatory rules to trade double top pattern successfully
1) One-sided or power move towards a strong resistance level.
2) A good neckline is required.
3)Draw three magic lines as per the calculation given above.
4)Take entry in the entry zone only. Entry zone is an area of three lines, i)High line, ii)Middle line, iii)0.001 line.
5) Entry after the price breaks the middle line without closing the red candle in the entry zone, then it is an aggressive entry.
6) Entry after closing of a red candle in the entry zone, then it is confirmed entry. In case of confirmed entry if the price breaks the previous or first peak top level then avoid this M pattern.
7) Avoid reentry always, If the price hits your SL then strongly avoid reentry. The market may be trapped here. So avoid setup in this type of situation.
8) A risk-reward ratio minimum of 1:2 is required, if not then avoid set up compulsory.
You may also like to read: How to Trade Head and Shoulders Pattern on A Trading Chart
Common mistakes to avoid when trading double top pattern
Trading double tops can be very profitable, but there are several common mistakes that traders make. Here are some things to avoid:
- Getting in too early
One of the most common mistakes traders make is entering a trade too early before the price enters in entry zone. This mistake is the reason for the big stop loss. So avoid it strictly.
- Not using stop-loss
Always use a stop loss when trading a double top pattern. Without a stop loss, you expose yourself to significant risk if the market moves against you. Set your stop loss at the peak of the first top high to protect your trade. And it is very small compared to the profit.
- Not considering a broad view
Always zoom in and zoom out the chart before trading the double top pattern. Sometimes in bigger picture chart gives a different message, and traders have to understand it.
- Ignoring chart nature
While trading any setup or pattern traders have to consider chart nature. Sometimes after making the perfect setup or pattern market goes against the trader and hits their stop loss. It happens due to chart nature. The market always tries to fulfill its nature which is, it travels in a zigzag. So consider it carefully.
- Poor chart reading skills
Chart reading is the most important part of a successful trading journey. A chart tells you everything about the market. If anyone learns chart reading skills then no need for any other things. Chart reading is supreme. Everything is included in chart reading Setups, patterns, chart nature, support resistance. So traders have to perfect this skill.
- Setting unrealistic goals
Be realistic when setting your profit goals. While the double top pattern gives you a good indication of possible price movements, the market does not always follow predictable patterns. Make sure your profit target is achievable and consider using trailing stoploss to lock in profits when the price moves in your favor.
Conclusion
The double top pattern is a reliable tool for identifying trend reversals and making profitable trades. By learning to spot patterns, confirming them with calculations, and using proper risk management, you can increase your trading success rate. Always wait for the aggressive or confirmed entry before entering a trade and set a realistic target with a stop loss to protect your capital.
By following these steps, you can confidently trade double top patterns and increase your chances of profiting from market trend reversals. Happy trading!