How to Trade a Double Top
To trade a double top, mark the neckline at the trough between the two peaks and wait for price to close below it. The pattern is not complete until that break, and the measured target is the height of the pattern projected down from the neckline.
A double top is two peaks at a similar level separated by a trough. The pattern is not the two peaks — it is the break of the trough between them, and everything about trading it well follows from that distinction.
Before you start
A tolerance for how close the two peaks must be, written as a number. Within one percent, or within half an average bar range. A number, decided in advance.
The neckline marked before the second peak forms, not after. The trough is visible as soon as the first pullback ends, so the level can be drawn early.
A prior uptrend, because without one there is nothing to reverse. Two peaks in a sideways range is a range, not a reversal pattern.
The steps
1. Require a prior uptrend
A sequence of higher highs into the first peak. Without it the pattern has no context and the same shape means something entirely different.
2. Mark the neckline at the trough
One horizontal line at the low between the two peaks. Drawn as soon as that low forms, which is well before you know whether a second peak is coming.
3. Check the second peak against your tolerance
Measure the instrument’s ordinary bar range over the stretch of chart that contains both peaks, in price units rather than percent. Two peaks differing by less than that are similar; a wider gap is a different shape you are choosing to call this one.
4. Wait for the neckline break
A close below the neckline completes the pattern. Trading the second peak is trading a hypothesis; this is trading a completed structure.
5. Take the measured move as the target
The distance from the peaks to the neckline, projected down from the break. It is a convention rather than a prediction, and it gives you a level to plan against.
6. Put the stop above the second peak
Not just above the neckline. If price returns above the second peak the reversal reading has failed, and that distance is what sets the position size.
7. Record the candidates that never completed
Every twin-peak shape that never broke its neckline is a candidate that did not become a pattern. Nobody publishes those, so your own record is the only sample of them you will ever see.
How to tell it worked
A prior uptrend was present, verified rather than assumed.
The neckline was drawn before the second peak completed, so 0 levels were placed by hindsight.
The two peaks differ by less than 1 average bar range, measured.
And 0 trades were taken at the second peak, every entry coming on a close below the neckline.
What the pattern does not tell you
How far price will actually go. The measured move is a convention rather than a forecast, and a projection taken from the pattern’s height can exceed what the instrument travels in the time you plan to hold. It can also fall far short of what happens: the S&P 500 dropped 56.8% from its October 2007 peak to its March 2009 low, well past any target a top drawn in 2007 would have projected.
Whether anybody participated. Two peaks formed on almost no volume look identical to two formed on heavy volume, and the pattern reads price alone.
Why the second peak is the expensive entry
At the second peak the pattern is one of two things and they are indistinguishable. A double top forming, or an ordinary pullback in a continuing uptrend that happens to start near a prior high.
Since 1950, 59% of ten-day windows in the S&P 500 finished higher, so on a broad index the continuation reading is the one the base rate favors before any pattern is considered. The ratio on your own instrument may differ, and it is worth counting before shorting a second peak.
The neckline break is what separates them, and it costs you part of the move. That cost is the price of trading a completed pattern rather than a hypothesis, and it is worth paying.
Trading the inverted version
A double bottom is the same structure upside down, and everything above applies with the signs reversed: two troughs at a similar level, a neckline at the peak between them, and completion on a close above it.
The one asymmetry worth knowing is speed. Declines tend to be faster than advances, so a double bottom typically takes longer to form than a double top of comparable size — which means more bars, more chances to be tempted early, and a longer wait at the neckline.
The base rate also runs the other way. Across the S&P 500 since 1950, ten-day stretches ended above where they started 59% of the time, which mildly favors the double bottom’s direction and mildly works against the double top’s, at least on an index with a long upward drift.
Neither effect is large enough to trade on its own. It is worth knowing because it explains why the two patterns feel different to trade despite being geometrically identical.
The original data
Of the 24,971 unique videos in this site’s search study, 54 mention this pattern in the title, at a median of 14,482 views across 47 channels, and 56% of those titles are instruction-shaped. Head and shoulders appears in 46 at 3,550 and cup and handle in 41 at 3,390.
54 videos at 14,482 — four times the audience per video of the other reversal patterns. The simplest shape reaches the most people, which is a consistent pattern across every group of concepts measured on this site.
Before the neckline breaks the pattern does not exist yet. A double top is completed by the neckline break — until then the same bars are equally consistent with a pullback, and the base rate favors that reading.
When it fails
The failure is the pattern traded at the second peak, and it works often enough to keep doing it. Sometimes the neckline does break and the early entry captured extra distance. The trades where it did not break are not remembered as failed double tops, because they were never labeled — they became ordinary continuations and the shape stopped looking like a pattern. What is left in memory is a run of early entries that worked, and no record at all of the ones that quietly did not.
The second failure is a neckline drawn afterwards. The break is then certain by construction.
A third is no tolerance for the peaks. Any two highs qualify.
A fourth is no prior uptrend. There is nothing being reversed.
A fifth is a stop at the neckline. The pattern fails above the peak.
And a sixth is treating the measured move as a forecast. It is a convention.
Related
Double top covers the pattern itself. Double bottom is the same structure inverted. And measured move is where the target convention comes from.
I do not take this at the second peak, before the neckline breaks. At that moment it is not a double top, it is a pullback in an uptrend that happens to be near a prior high. Those two look identical until the neckline decides between them.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.