For example if a trader has seen hundreds or thousands of double tops in their trading career, they may know which ones have a higher priority and which ones to skip. They may have fine tuned their entries and exits to suit each setup based on experience. The difficulty is that the discretion cannot be accurately tested. I agree that traders often do things that have a perceived edge but don’t test their theories thoughtfully in live market conditions.
The more difficulty a stock has of breaking through resistance the more chance it has of falling further. Traders will open a long position at the level of the second low of a double bottom and/or after a resistance breakout confirmation. Often occur at widely anticipated breakout points like the neckline of a double or triple bottom. Vast flocks of inexperienced traders will attempt to go long at these points. So, big, experienced players may attempt to use these breakout points to fool you into selling too early near the bottom or buying too late near the top. The below strategies for trading double top and double bottom patterns are merely guidance and cannot be relied on for profit.
Instead, it bounced off the neckline and resumed the overall bearish trend before the first low. That momentum eventually stopped, and the second low was formed. Here, the trend experienced a more permanent reversal and continued up through the level of resistance as the neckline. As an example of a double-top trade, let’s look at the price graph below.
Nifty 50 Breakout Gap
Pink Asterisks show the two tops, which are within 1% of each other. Gold triangle shows the bar on which the Double Top pattern was completed. Red Arrow is the Short entry on the open and green arrow is the exit on close. Both double top and bottom patterns can be used in trading to provide entry points, as well as stop-loss and profit target locations. At this point, if the momentum had continued higher the pattern would have been void.
How CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading. The pattern is only confirmed once the trendline has broken through the neckline, if it does not then either pattern is void. In addition, you could get other kinds of confirmation of the reversal. Stop orders to protect themselves from sustaining a loss in case the market continues to rise after the second peak.
Two Peaks And A Neckline
This time, the retracement broke through the neckline which signified a more permanent reversal in the overall momentum of the asset’s value. Just as with the double top, it is paramount to wait for the resistance breakout. The formation is not complete until the previous reaction high is taken out.
The other difference was that any short trade must be placed before 2pm and all trades are exited on the close at 4pm. We can then run an optimization to see which settings work best in the context of a double top and therefore how best to trade this reversal pattern. Most descriptions of a double top include two price peaks and a supporting neck line. Small declines may not be indicative of a significant increase in selling pressure.
Final Thoughts On The Double Top Pattern
There are a few variables that may greatly change your results. A double top into heavy resistance will have a much higher chance of success. A double top that forms after a parabolic move or overextension will have a higher chance of success. Double tops after a slow grind are less likely to reverse significantly, and more likely to end up in a breakout. I think most discretionary intraday traders are looking for these other variables before pulling the trigger.
They are used to determine whether a bearish trend is turning bullish, or whether a bullish trend is turning bearish. Stop orders to limit the loss in case the market resumes the downtrend after a temporary advance above the neckline . A third test of the support/resistance level makes this a triple top or bottom. There may be some benefit to a double top formation as a hedge to a long strategy but profits of only 0.2% are unlikely going to cut it when we introduce commissions and slippage. In the next table you’ll be able to see the results of our optimization during the in-sample period. For example, a double top only looks like a double top after the stock hits a high then drops through the accompanying support area.
E top and double bottom patterns, as well as providing a range of order execution tools for fast trading, which in turn helps you to manage risk. Although there can be variations, the classic Double Bottom pattern usually marks an intermediate or long-term change in trend. Many potential Double Bottom patterns can form during a downtrend, but until key resistance is broken, a reversal cannot be confirmed.
One issue that concerns me be about your results is the entry and exit criteria. Your entries seem to be quite late and your system exits quickly. Adjusting your entry and exit criteria could have a massive impact on returns. The real conclusion is that to trade double tops successfully you need to have something else going in your favor. You can’t trade the pattern alone and expect to get rich.
Before we wrap up, I also wanted to run some analysis on intraday markets to see if double top reversal patterns are more profitable on higher frequency data. You can see from the above that some variations of our double top pattern have a slight edge with an average profit per trade of up to 0.39%. You can also see that some variations have win rates as high as 56%. For this analysis we decided to test the performance of double tops on all S&P 500 stocks across holding periods from one to ten days.
Bottoms usually take longer to form than tops; patience can often be a virtue. Give the pattern time to develop and look for the proper clues. The advance off of the first trough should be 3-5% in FX and 10-20% in stocks. The second trough should form a low within 0.5% in FX and 3% in stocks of the previous low and volume on the ensuing advance should increase. The bottoms are lows that are formed during an uptrend, when the price hits strong resistance, bounces down, and repeats this process, forming a double top. If this process repeats a third time, that’s a triple top.
Emini 6-Bar Bull Micro Channel
The double top is a bearish chart pattern consisting of two consecutive price peaks that leads to a bearish reversal. For years, traders have claimed that the double top pattern is a high probability short setup. Double tops and double bottoms are trend reversal patterns. Our best avg profit per trade was .81% trading the 15-minute chart for USO however this was a very small sample size of only 3 trades. Our best average profit per trade was only 0.06% trading the 15-minute chart for SPY.
As you can see, the trend before the first peak is overall bullish, indicating a market that is rising in value. However, the upward momentum stops at the first peak and retraces down to the neckline. Trading any type of chart patterns requires patience and the ability to wait for confirmation. The appearance of one of these patterns alerts traders of a price reversal, but until that occurs, most traders leave the pattern alone. Although there can be variations, the classic Double Top Reversal marks at least an intermediate term, if not long-term, change in trend from bullish to bearish.
These are all reversal patterns, that is, they suggest that the current trend will reverse. Joe Marwood is an independent trader and investor specialising in financial market analysis and trading systems. He worked as a professional futures trader for a trading firm in London and has a passion for building mechanical trading strategies. He has been in the market since 2008 and working with Amibroker since 2011. Sure, totally agree with you there can be a discretionary element, that’s what I tried to mention in the closing statement. Traders might have tricks, secret sauce etc that helps them pick the winning patterns from the losing ones.