The double top chart pattern is a reversal chart pattern. It can be seen in all timeframes. If often gets formed when price has moved upwards for an extended amount of time. The tops or swing highs are formed when price hits a certain resistance levels where it cannot break it to the upside.

This strategy is exactly the opposite of double bottom trading strategy.

Timeframes : Works best on 15mins chart and above

Instrument : You can use in any Instrument

Note: Know how to identify Bearish Reversal Candlesticks.

Identifying the double top chart pattern:

It is easy to identify a double top chart pattern.

• Look for Two tops, top1 & top2 (or swing highs or peaks) that are almost on the same price level.
• There must be equal distance in terms of time it takes to form the high(peaks)
• Few traders like to include a third requirement to classify a double top: volume. They see a decrease in volume on the second high. This gives them added confidence that the buyers are losing steam!

Let us explain with a chart below:

Let us understand using a chart:

• Look for two tops or peaks forming after a strong move upward.
• Also notice that the second top or swing high (or peak) is unable to break the second top or swing high(top2).
• When price fails to break this resistance level above top2, we get a strong indication that a reversal is going to occur.
• You can now use volume as a further confirmation to confirm if buying pressure is decreasing as well.

When you see all the things happening as above, you should take your trade because price tend to move fast downward once top 2 resistance level is not broken to the upside.

Trading Rules :

Double top trading strategy is really simple and there are two ways to trade it:

• The Aggressive Entry
• The conservative Entry

The Aggressive Trade Entry Rules:

• After the second top is formed, watch for a bearish reversal candlestick formation.
• Then Place a sell stop order just 3-5 pips below the low of the bearish reversal candlestick formation.
• After that place your stop loss at either a few pips above the bearish reversal candlestick formation, 5-10 pips or you can place it just a little bit outside of both the 1^st top the 2^nd top, anywhere from 5-20 pips.
• Set take profit at the neckline.

The Conservation Trade Entry Rules:

• Wait till the price breaks below that neckline. Just make sure the candlestick that breaks the neckline must close below it.
• After that place a sell stop order 3-5 pips below that breakout candlesticks low.
• Then place your stop loss anywhere from 3-10 pips above the neckline or just above the high of the candlestick.
• Set Take profit by calculating the distance in pips between the neckline and the 1^st top (or the second top, whichever you prefer) and use that number take profit target price level.

But the problem using the conservation approach is stop loss would be too large if the neckline is too far away from the tops.

Pros :

• You can make a lot of money as the downward move that happen after the formation of the 2^nd top can go a long way, even for weeks, if you are trading off the daily chart and if you continue to ride the trend.
• If you are confident at what to look for, it is the best strategy.
• Risk for each trade is far better compared to other trading strategies just because you will be using support and resistance levels to place your stop loss.

Cons :

• Sometimes you can get tricked. You may come across situations where there will be price spikes just to trigger all the stop losses placed just above top1 and it would seem as there would be a breakout to the upside but this is just a trick. Later you will see price fall back all the way down. (The key is being vigilant and if a price spike takes you out with loss, then watch and wait to see if you enter on the 2^nd Just wait for another reversal candlestick. Even if it is the spike candlestick, enter again!)
• Avoid trading in lower time frame using this strategy.