Naked Trading: The Double Top Chart Pattern Strategy

The Double Top Chart Pattern strategy is a powerful tool for traders seeking to capitalize on market reversals. This strategy is built around a simple yet effective chart pattern, recognized for its reliability in indicating potential downturns in price trends.

By focusing on the formation of two distinct peaks, traders can identify key entry and exit points, enhancing their decision-making process. This approach combines technical analysis with a clear, structured methodology, making it accessible to both novice and experienced traders.

Eemphasizing practicality and applicability, this strategy serves as a solid foundation for developing a robust trading system.

Keep reading to learn more!

The Double Top Chart Pattern Strategy

The double-top reversal is similar to the triple-top pattern. They are so closely related that the only difference between them is the number of resistance retests.

More than 95% of Forex traders are estimated to lose money. One of the reasons this statistic looks so stacked against traders is that you have been exposed to the wrong teachings. However, we plan to change that by revealing an unconventional way to trade the double top reversal.

Moving forward, we will discuss what makes a good double-top reversal. We will highlight five basic trading rules to conquer the markets with the Double Top Chart Pattern strategy. Also, feel free to read how currency pairs work in Forex.

What Is a Double Top Pattern Reversal?

The double-top pattern is a bearish reversal trading pattern that emerges at the end of a bullish trend.

Moreover, the double top reversal comprises two consecutive peaks with approximately the same highs. The first peak forms when the bullish trend finds resistance, and the price retraces until it finds a support level, which we call the neckline.

In the second phase, the price moves back upward towards the resistance created early by the first peak. However, it fails to break it and instead falls down to the neckline again.

Jesse Livermore, one of the greatest traders to ever live, said that big money is always made at these significant turning points when the trend changes direction. We believe that the Double Top Chart Pattern strategy can help you achieve all your financial goals.

The Psychology Behind the Double Top Pattern

The double-top reversal pattern highlights the battle between the bulls and the bears. After the price moved in a bullish trend and formed the first peak, it showed that the bulls were running out of steam.

After the first pullback, the bulls try to push the price to new highs. They failed to break the previous peak as the bears gained control and drove the price down.

Note: The double-top reversal is only valid when the double-top breakout happens. By the double top breakout, we mean the neckline breakout.

The bulls will only capitulate when the double-top breakout occurs. This is clear evidence that the market tide is turning around. So, the double top reversal is confirmed once the neckline is broken.

Now, let’s see how you can effectively trade with the Double Top Chart Pattern strategy. You’ll learn how to make profits from basically using naked charts.

How to Trade Using the Double Top Chart Pattern Strategy: Sell Rules

We have found out that the most successful trading strategies are those that use naked charts. A naked chart is simply a chart that only shows the price. It’s a very clean representation of the price. However, your view is not clogged with lots of technical indicators.

The Double Top Chart Pattern strategy is the answer to your messy charts.

When trading reversals, it’s crucial to analyze the market within the context of the market phase and a chart pattern, a.k.a the double-top reversal.

Step #1: Identify the Phase of the Market. The Double Top Reversal Needs an Uptrend.

Just because you can spot the double-top reversal doesn’t mean you have to jump in willy-nilly. Remember, we need the proper context, and everything needs to line up for an excellent double-top reversal.

So, the first step is to identify the phase or market condition. At any given moment, the market can be trading up or down or go sideways. As we previously established, the double top reversal needs a prior uptrend.

Since this is a reversal trading strategy, we first need a prior trend. Otherwise, we end up trading just a ranging market. We want to avoid this, mainly if we trade the double top reversal pattern.

Step #2: The Historical Precedent. An A++ Double Top Reversal Is Composed of Two Rounded Tops.

The second step of the Double Top Chart Pattern strategy is to find the historical precedent or a chart pattern. We don’t want to make a trading decision without price confirmation, and in our case, we use the double-top reversal pattern.

You need to identify two rounded tops for the double top breakout to be considered tradable.

However, what is a rounded top?

In technical analysis, a rounded top is simply a price formation that typically occurs after an uptrend. Prices move upward and then quickly roll back downwards, creating a dome or sometimes an inverted “V.”

Now, of course, depending on the double-top reversal structure, the inverted V top will vary in size and magnitude. However, the idea is that we need a quick move up followed by a sharp move down to define a rounded top.

Note: A valid double top reversal has two rounded tops.

Let’s move forward to the third criterion of our Double Top Chart Pattern strategy.

Step #3: Allow 10 Pips Variation Between the Two Tops.

Don’t seek perfection because, in trading, you need to get rid of your idealistic mindset, as the double top reversal will not always look perfect, so be flexible.

This is why we need to allow a maximum of 10 pips variation between the two tops.

The probability of two tops happening at the same price level is almost impossible. You’ll often find that the two tops have slight variations, but they occur near the same price zone.

What is more important is the closing price, which can align perfectly if the location of the double-top pattern is good.

So far, so good.

Now, we need to determine an entry technique for our Double Top Chart Pattern strategy.

Step #4: Sell When the Double Top Breakout Candle Closes below the Neckline.

After we identify the phase of the market and the characteristics of an excellent double-top reversal, we need to wait for confirmation that the momentum is shifting.

The double-top breakout candle is our signal that the momentum has shifted, and it’s what confirms and validates the double-top pattern.

You’ll see the double top breakout happen repeatedly, but it’s essential to analyze them within the context of the market trend.

The next logical thing we must establish for the Double Top Chart Pattern strategy is where to take profits.

Step #5: Take Profit Equals 2 or 3 times the Distance in Price as Measured from the Highest Peak to the Neckline.

The minimum profit target for the double top pattern is approximately equal to 2 or 3 times the distance in price as measured from the double top to the neckline.

If we project the same price distance 2 or 3 times more to the downside, we obtain our first take profit zone for the Double Top Chart Pattern strategy.

The double top pattern can produce a significant reversal, so we advise you to be very flexible with your profit target so as not to miss any big profit opportunity.

Now, the next important thing we need to establish is where to place your protective stop loss.

Step #6: Place the Protective Stop Loss Slightly above the Resistance the Double Top Reversal Created.

The Double Top Chart Pattern strategy gives you a simple way to quantify risk because you can place your protective stop loss slightly above the double-top pattern.

Moreover, the double top pattern gives you the opportunity to also trade with a tight stop loss, which is great as we always want to keep losses at a minimum.

Note: The above was an example of a SELL trade. You can use the same rules, but in reverse, for a BUY trade. This time, we will use the double bottom pattern. In the figure below, you can see an actual BUY trade example using the double bottom pattern.

Conclusion

As we conclude, the double top reversal is one of the most common patterns. The fact that the double top pattern appears so often and can offer big selling opportunities is proof that the price is not random and can be exploited for big profits. You can also try trading with a breakout triangle strategy.

The bottom line is that you still need a plan to trade the double top breakout successfully, and our Double Top Chart Pattern strategy should answer all your questions regarding how to make money with this simple pattern.

Don’t forget to check out our previous guide on symmetrical triangles, which is a great continuation pattern to exploit if you miss the top or the bottom of any market.

Thank you for reading!

Please leave a comment below if you have any questions about the Double Top Chart Pattern strategy!

Double Top Pattern Example Trading Video

Double Top Chart Pattern PDF Download

Enhance your trading skills with our comprehensive resources, available in the Double Top Chart Pattern PDF guide. This resource is designed to provide you with an in-depth understanding of this chart pattern, a crucial element in technical analysis.

Whether you’re a beginner or an experienced trader, this guide offers valuable insights and practical tips to help you navigate the markets more effectively. Download your copy today and start refining your strategy for better trading outcomes.

Double Top Chart Pattern Info-graphic Download

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