How to Trade Double Tops - Winning Strategies

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Today we are going to discuss a very common chart formation. It is a reversal chart pattern, which appears at the end of trends. If you notice an upside perfect W formation in stock charts, then you can consider yourself familiar with the well-noted double top chart blueprint.

In this article, I bequeath teach you how to identify this pattern and how to trade it.

Dual Top Definition

The big top is a chart pattern with two vacillatio highs rattling enclose price. This pattern can be seen in all time-frames. There are a a couple of requirements to classify a chart pattern as a double top:

Two peaks that are near isometrical in price
Equal aloofness in terms of time between highs
Intensity decreases happening the second top

Double superior have an enormous measure of "cause" OR breakout potential as the cost of the stock has moved back in forth inside a formed range. So, when the stock finally breaks out, in that respect is an expansion in volume and price movement. Breakouts fanny go on to some the upside and downside. If you enter a breakout of a doubling top graph pattern, you will desire to keep a close stop above/below the support and resistance level.

Double Top Verification Signal

Every chart pattern has a substantiation signal. The double top graph pattern is no different.

The pattern has a trigger level, which is secondhand for confirming the pattern and for possible action positions in the direction of the reverse breakout. The signal line is located at the bottom, between the two tops of the pattern. When this line is broken, we have a reversal confirmation signal and a nice opportunity to go against the primary tendency.

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The image below illustrates the doubling top breakout, and the breakout ratification set off.

Double Top

Double Teetotum

Above, you see a standard double top chart pattern of the 2-minute chart of Microsoft from January 15^th, 2016. After a rally to top 1, MSFT had a minor correction prior to creating a second gear top off.

The bottom between the two tops is the signal line which is used to confirm the pattern. After creating the second top, the breakout through the signal line is the check signal of the pattern. In this case, the proper moment to short MSFT supported the double upmost strategy is with the closing of the long bearish candela, which breaks the signal line.

As you see, after the double top ratification breakdown, the price continued lower, reaching $50.37 per share.

Double Round top Price Target

After the confirmation of the pattern, your minimum direct is adequate to the size of the formation. In other words, when a farm animal breaks out of a double top shaping, the damage target is the range of the formation added to the breakout stratum.

Double Top Price Target

Doubled Top off Price Target

Above is the 2-atomlike chart of Hewlett-Packard from January 14, 2016. The image displays another double crown pattern model, where we measure the size of the figure and its nominal fair game.

The black lines on the image follow the price action mechanism, which confirms the double top. The blue horizontal rectangle is the range of the constitution. Formerly the price broke the bespeak line, I used the range to count on the price target of the convention.

Find that the ordinal top is slightly higher than the first one. For this reason, we take this top to appraise the size of the pattern. We stretch the blue arena area from this top to the signal cable. The range between these deuce levels is the size of the pattern. IT appears that this double top establishment is $0.07 (7 cents) long.

Now that we know the size of it of the figure, after the two-bagger top is confirmed we need to calculate our minimum target.

Simply take $0.07 (7 cents) and deduct this value from the signal assembly line shown on the image. Notice that the two blue areas are absolutely identical. The reason for this is that the negligible target of a double top equals the size of the formation. Since the indicate logical argument is located $10.74 per share, then the minimum target of the pattern is at $10.74 – $0.07 = $10.67. In this manner, the radiation pattern on the chart provides an opportunity to short HP for a profit of 0.63%.

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Forked Top Risk Direction

Many traders exact that when you barter double tops, you should place your stop departure above the get down uppermost. In person, I DO not agree with this rule. The reason for this is that if you put down your stop above the lower pinnacle, in numerous cases your win-loss ratio is inferior than 1:1.

Since we know that the double upmost pattern success rate is 65%-70%, we would be walking into a losing situation with these sympathetic of betting odds.

For this reason, I believe the stop loss should come nearer to the entry Mary Leontyne Pric. For example, you can put your turn back loss at another smaller swing point or candlestick high-level, which comes after the second bottom. If the price act up after the bearish bottom is consistent with no corrections, and then simply measure the distance between the sec bottom and the trigger line, and place your stop loss in the middle.

I think this is an optimal risk management solution for the duplicate circus tent chart system. This way, you will nark least 1.8 : 1 win-loss ratio, which makes the pattern organisation profitable. Own a feeling at this double top pattern deterrent example, which compares the two take chances direction systems.

Double Top Price Target - 2

Dual Top Price Target – 2

Above you see a standard double uppermost chart practice of Facebook. The chart frame is 1-little from March 30^{atomic number 90}, 2016.

The melanize lines bespeak the double top figure. The red ray is the signal stemma of the pattern. The two blue areas on the chart are the size of the formation and the respective borderline place. The two reddish areas are the two cease loss options we have.

In the first option the stop loss order is located higher up the second crest. Arsenic you see, this is $0.20 (20 cents) above the entry terms, which is a 0.18% price move.

However, the target is located $0.19 (19 cents) below the entry price and this is 0.17%. In this manner, the win-loss ratio which we get with the first stop loss alternative equals 0.17 : 0.18.

0.17 : 0.18 = 0.17/0.18 : 0.18/0.18 = 0.94 : 1 come through-loss ratio

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As you see, in that case you wish take chances 1 and will stimulate less than 1, which simply does not add up without a win ratio of 85%+.

Thence, I suggest using the second occlusive loss option. On the way down from the second big top to the signalise line, the price created only one candle which is non bearish – it is a doji.

Therefore, I use this as a top (a price action steady), where I can place a tighter discontinue. Furthermore, this level is approximately the mid-point betwixt the topmost and the signal line, which conforms to the other ruler we have when choosing a stop loss level.

When placing the stop loss, we risk only $0.11 (11 cents), which is 0.09%. Since we have the assonant butt, we now get the following win-loss ratio:

0.17 : 0.09 = 0.17/0.09 : 0.09/0.09 = 1.89 : 1 win-loss ratio

I believe this option is definitely better than the first one. After all, if the price increases through the midpoint of the second top and the signal line, IT will rarely re-start pursuing the minimum target of the pattern.

Look-alike Bottom Graph Pattern

The double top graph pattern has its identical twin – the twofold merchant ship chart practice. The difference of opinion between the two patterns, is that the double bottom is a full mirror image of the double top. This agency that all we have stated thus far is applicable for the double bum convention in the other direction.

Below is an epitome of the double bottom formation.

Double Bottom Chart Pattern

Double Bottom Graph Pattern

Above we see the 2-min graph of AT&T for Mar 30, 2016. The image illustrates a classical W Bed chart pattern. The red level ray is the signal line of the pattern. When AT&T breaks this wrinkle in a bullish charge, we get a long signal for a minimum target equal to the size of the form. As you determine, the double bottom really works the same right smart American Samoa the double top pattern!

Trading the Double Top and Double Bottom Chart Patterns

Like a sho that you are informed with the treble crowning chart definition and the double bottom formation, I will now record you how to trade them with success.

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Double Top and Double Bottom

In a higher place you see the 2-minute chart of Google from Mar 21, 2016. The image displays cardinal trading cases – a doubly top and a double bottom of the inning chart pattern.

After a decent price increase, Google creates a top. Then there is a corrective move followed by a new terms increase which develops into a second apical. The red horizontal ancestry on the arse between the two A-one is the signal line.

Subsequently creating the second top along the graph, GOOG decreases direct the red signal line. This breakout gives us a confirmation signal of the pattern and a great short opportunity.

The first two blueing areas on the graph are the sizing and target of the double top graph pattern. The first red expanse is the risk we are attractive on this pattern and the individual stop personnel casualty localisation. The hitch loss exposes us to a risk of 0.21%. At the same time, the minimum target calls for a profit of 0.49%. In this manner, we get over a gain-release ratio of: 2.33 : 1

0.49 : 0.21 = 0.49/0.21 : 0.21/0.21 = 2.33 : 1

After we short Google, the price continues its decrease. 20 proceedings later, Google completes the minimum target of the double top pattern and we close the trade with a .49% profit.

The decrease which brings us the .49% profit creates the first fanny of the next pattern on the graph. After a bullish correction and a new step-down, the price action creates a second bottom on the chart.

We bill the double bottom potential drop on the graph and we build our signal line. IT should be placed on the top, which is located betwixt the two bottoms of the pattern. The second two blue areas on the chart measure the size of the double bottom of the inning and its various target.

A young gain of the Google price leads to a gaolbreak through the signal line, which confirms the pattern. Our double bottom pattern branch of knowledge analysis shows USA a trifle bottom below the entry price, which looks look-alike a great location for our stop loss. In this way, the &ger we are winning in this trade equals to 0.23%. Simultaneously, our target is 0.37% profit. In this manner, our win-loss ratio equals: 1.61 : 1 win-loss ratio.

0.37 : 0.23 = 0.37/0.23 : 0.23/0.23 = 1.61 : 1 win-red ratio.

After we go long on the signal line prisonbreak, the Google price continues its increase. 34 transactions later Google reaches the target of the pattern and we close our trade with a 0.37% profit.

The result from these two trades equals 0.86% profit for to a lesser degree 1 hour of "work". The risk we took equals to 0.44%. The average winnings-loss ratio from the 2 positions equals to:

0.86 : 0.44 = 0.86/0.44 : 0.44/0.44 = 1.96 : 1 win-loss ratio

Conclusion

The double top is a blow chart pattern with two swing highs, which are very close in price.
The bivalent top potty be found in all fourth dimension frames.
The worst betwixt the two tops indicates the three-fold top's signal melody.
When the price breaks the signalise line after creating the second top, we nonplus a confirmation of the pattern.
The Leontyne Price fair game of the double top pattern in duration equals the size of it of the organization.
The risk you are attractive in a double top trade should be less than the size of it of the pattern in duration. This way you will get more 1:1 win-loss ratio, devising your double high strategy profitable.
The identical twin of the double crowning is the double bottom pattern. All the rules we discussed are fully applicable for the double bottom too, simply in the opposite direction.