Double Top (aka “M Pattern” & “Twin Top”) is a reversal price action pattern that typically occurs in an uptrend.
A Double Top forms when the price gets rejected twice on two consecutive peaks.
After the formation of a Double Top, the price usually goes to the downside which starts a new downtrend.
However, on rare occasions, the price could also go to the upside as well.
Hence I’ll walk you through both scenarios to trade effectively on whatever side the price does the breakout.
How to Trade Double Tops?
I’ll show you the procedure of trading Double Tops in 4 simple step-by-step processes.
- Identification
- Entry
- Stop-Loss
- Target Measuring and Profit Taking
Identification of a Double Top or M Pattern
In the case of a Double Top, the price first makes a high, does a pullback, bounces from a specific price point, and then tries to create a new high but starts to move back again (pulls back again) from the previous swing high.
Afterward, the two consecutive peaks make the pattern looks more like the letter M.
And then the trough at the bottom makes a neckline or valley which will be used to set up your short trade.
The following image illustrates the typical price action of a Double Top.
Setup and Entry
For the trade setup, mark both the swing highs and the swing low of the through.
The upper line that marks the two peaks is the resistance line and the line that marks the through is the neckline (support).
To take an entry or to open a position you have to wait for the price to break through either of the lines.
I’ll explain:
You have to open a short position when the price breaks below the neckline and closes below it.
For example:
I opened a short position in “ADANI ENTERPRISES” back in Feb 2020 right after a 4-Hour candle closes below the neckline.
You can also immediately open a short position right after the price breaks the below the neckline.
However, I won’t recommend taking a position immediately without confirmation as the price may be just testing the support level.
In this type of scenario, the price could suddenly bounce from the support level.
Placing the Stop-Loss
Stop-Loss is the pre-determined price level at which your trade gets invalidated.
And in such an invalidation point you should quickly get out of the trade by placing a market order at a specific price level.
You might think…
How do I calculate the Stop-Loss level?
I’ll explain:
The SL should be calculated based on the prior micro chart pattern as well as the breakout candle.
In the case of the ADANI ENTERPRISES trade, I placed the SL above the breakout candle.
The micro chart pattern could mean a compact price action range before or after the breakout occurs which is typically built by a set of small candlesticks.
So when the price breaks out of a compact price action range, the SL should be placed above the high of that tight range.
The following Bitcoin chart has a small range, making a micro chart pattern.
In the BTC chart, there is a build-up formation before the continuation of the downtrend.
The stop-loss was placed just above the swing high of the micro-pattern (marked with a black horizontal line).
If there’s no prior or subsequent consolidation range then the SL can be placed above the breakout candle’s high.
Because in some cases the price breaks out without any build-up of tight range just above or below the neckline of the Double Top.
How to Measure the Target of a Double Top and Take Profit
The measuring technique of a Double Top based on price action is quite simple.
Just calculate the distance between the two peaks and the trough (which is the swing low of the Twin Top) and subtract that value from the price level of the swing low.
To avoid the manual calculation, draw a vertical line using the trendline tool and drag it from the Twin Top swing high to the neckline or base of the trough (swing low).
After you finish drawing the line, drag it and place it on the neckline.
Just like this:
I took the height of the first top because the second top is longer than the first top.
Which is nothing but a false breakout to the upside.
So next time see the second peak is higher than the first peak, just take the height of the first one.
If they are both almost identical, take the average or go with the confluence.
Just like this:
Now the question is:
Should you blindly wait for the target to take your profit?
Well, there is no fixed rule here.
The disadvantage of waiting for the target to be met is that…
…The price could bounce from any specific price level before it reaches the technical target of the Double Top pattern.
If the market is taking too long to reach your target then consider taking a partial profit (kind of like 50-60% percent profit taking) and move your stop-loss to the entry price.
You can also trail the SL below the entry price to lock in your profit.
Trading Double Tops Upon Upside Breakouts
What if the price does the breakout to the upside?
It’s deadly simple.
Just place the bar above the resistance line and you’re done.
However, you need to keep something in mind.
Wait for 2 or 3 candle closes above the resistance line of the Twin Top before you open a long trade.
This is necessary because the upside breakout may not be successful from time to time.
SIDENOTE: If you’re skeptical enough and don’t wanna go long, then just sit relax, and wait for more price action to unfold.
Difference Between Double Tops and Double Bottoms
You may have also heard the term “Double Bottom” (aka “W Pattern”) many times being talked about in the trading community.
This is nothing but the inverted or upside-down pattern of the Double Top and looks like the letter W.
The method of trading such a Double Bottom pattern is precisely the same as I’ve just shown with the Double Top.
The only difference is that you just have to do all the things in the opposite direction.
Just like in the following chart of “ADANI ENTERPRISES” where I’ve taken the height of the pattern and placed it above the neckline.
SIDENOTE: In Double Bottom, the resistance line is called the “Neckline” since it’s the opposite of the Twin Top pattern.
The target has been reached within 7 days and you can see how simple it is to trade Double Bottoms when you know how to trade Double Tops.
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FAQs
A double Top is a bearish price action pattern in which the price makes two consecutive highs that fail to pass through a specific resistance level.
A Double Top pattern looks like the letter M.
Double Tops don’t to be exact. In real-life situations, the pattern can be slightly different and you need to be a bit flexible while setting up your trade.
Irrespective of the time it takes, a reliable Double Top generally forms over 50-60 bars. So for example, in a daily bar chart, it would take about 60 days for a Twin Top to appear.
After a Double Top pattern, the price generally goes to the downside. However, sometimes the price may also go to the upside. In that case, one should wait for 2 or 3 candle closes above the resistance line of the Double Top before going long.
The second top of a Double Top can also be higher. In such cases, the second top is considered a false or failed breakout.
You should short a Double Top when a candle closes below the neckline.