Double Top Chart Pattern Trading Strategy: (Backtest & Example)
Chart patterns can help you understand the condition of the market. The double top pattern can warn you about a market peak, but do you know what it is and how to identify it?
The double top chart pattern trading strategy is a price action formation that consists of two swing highs that end around the same level. It is a reversal chart pattern seen at the end of an uptrend or a prolonged pullback in a downtrend. When completed, the pattern indicates that the price is likely to turn and head downwards.
In this post, we take a look at the double top pattern, and at the end of the article, we give you a backtest of the double top chart pattern strategy.
What is a double top chart pattern?
The double top pattern is a price action formation that consists of two swing highs that end around the same level, and a swing low between them. It is a bearish reversal chart pattern seen at the end of an uptrend or a prolonged pullback in a downtrend. When completed, the pattern indicates that the price is likely to turn and head downwards.
With the two swing highs ending at roughly the same level, that level becomes a resistance level. A line joining the swing low to the preceding swing low constitutes a neckline, which serves as a support level. When the price breaks below the neckline, it shows that the uptrend might be over and the price is about to decline.
Being a bearish reversal chart pattern, traders see it as a warning sign that the uptrend might be over and as such, close their long positions. Short sellers might open short positions when the price breaks below the neckline.
Psychology Behind the Double Top Pattern
A double top is ultimately a pattern of changing sentiment. It reflects a shift from enthusiasm and confidence to hesitation and, eventually, selling pressure. Understanding the psychology behind the formation helps explain why the pattern often precedes a reversal.
When the first top forms, buyers are still in control. The market has been trending upward, and sentiment is positive. As price reaches a previous resistance area, some traders begin taking profits. This creates a temporary pullback, but optimism usually remains intact. Most market participants still believe the uptrend will continue.
The critical moment occurs when price rallies back toward the first top. If the market truly has strong momentum, it should break above the prior high. When it doesn’t, the psychology changes. Traders who bought near the first peak now see that the second push upward has lost strength. This is often where doubts begin to emerge. If buyers cannot push convincingly to a new high, it signals weakening demand.
The failure to break the first peak also attracts short sellers. They see the inability to make a higher high as an early warning sign that the uptrend may be exhausted. At the same time, late buyers who entered during the second rally may quickly find themselves trapped when the price starts to retreat. This group often rushes to exit their positions, adding to the selling pressure.
The neckline break is the final psychological trigger. Once the price closes below the swing low between the two tops, long traders who were hoping for a continuation lose confidence. Stop-loss orders are hit, short sellers add exposure, and momentum shifts decisively to the downside. What began as a simple hesitation at resistance becomes a full reversal fueled by fear, trapped buyers, and strengthening bearish conviction.
In short, the psychology of the double top reflects the transition from bullish optimism to weakening demand and eventual capitulation. This shift in sentiment is what makes the pattern a reliable warning sign of potential trend exhaustion.
Volume Analysis / Confirmation
Volume plays an important role in validating the double top pattern. While price action defines the structure, volume helps confirm whether the underlying buying and selling pressure supports a potential reversal.
The first top in the pattern often forms with relatively strong volume. This is typical of an established uptrend where buyers are still enthusiastic. After the initial peak, the pullback usually occurs on lighter volume, signaling that selling pressure is not yet dominant.
The second top is where volume becomes more meaningful. A healthy uptrend should display increasing volume when retesting previous highs. If the rally toward the second top shows weaker volume, it often indicates waning demand. Buyers are less willing to push the price through resistance, and institutional traders may be scaling out of positions rather than adding to them. This reduction in participation is one of the earliest clues that the trend may be losing strength.
Volume during the neckline break is even more important. A genuine double top reversal is typically accompanied by rising or even heavy volume as price falls below the swing low between the two peaks. Increased volume on the breakdown suggests that sellers are in control, trapped long positions are being unwound, and short sellers are becoming more active. If the breakdown occurs on very low volume, it raises the risk of a false signal.
Some traders also look for volume divergence: decreasing volume on the second peak compared to the first. This divergence reflects reduced buying enthusiasm and strengthens the case for a reversal.
While volume is not a mandatory requirement for the pattern, it provides valuable context. Strong volume on the breakdown, along with weaker volume on the second peak, offers more reliable confirmation that the double top may lead to a sustainable trend reversal.
What is the best time frame?
The effectiveness of a double top pattern often depends on the time frame you use. While the structure can appear on virtually any chart, intraday, daily, weekly, or even monthly, the reliability of the pattern generally increases with higher time frames.
Daily charts are often considered the sweet spot for most traders. They provide a balance between enough price history to form a valid double top and manageable trading signals. On daily charts, double tops tend to reflect meaningful swings in market sentiment rather than short-term noise. Swing traders and position traders often prefer daily charts because the patterns capture genuine trend exhaustion and reversal potential.
Weekly charts can provide even more reliable signals, as the price movements reflect longer-term supply and demand dynamics. However, weekly double tops form more slowly, meaning fewer trading opportunities and wider stop-loss levels. These charts are more suitable for long-term investors or traders willing to hold positions for weeks or months.
Intraday charts- like 5-minute, 15-minute, or hourly charts – can also form double tops, but they are more prone to false signals due to short-term volatility and noise. Traders using intraday charts need stricter confirmation, such as volume spikes, multiple indicators, or observing multiple peaks in different intraday sessions to reduce the risk of being trapped by a failed pattern.
In summary, daily and weekly charts are generally the most reliable for identifying and trading double tops, while intraday charts can be used by more advanced traders who apply strict confirmation rules and risk management. Selecting the right timeframe depends on your trading style, risk tolerance, and how much time you can dedicate to monitoring the markets.
Example of a double top chart pattern
Below is an example of a double top in Tradingview:
From the chart above, you can see that the price was in an uptrend, as indicated by the blue arrow trendline. The price reached a peak and pulled back to the neckline (yellow line), and then started to rally again. It got to the level of the first peak and was rejected twice before it eventually declined to the neckline and broke below it.
Risk Management for Double Top Trades
Even a textbook double top pattern can fail, which makes proper risk management essential. Controlling risk helps protect capital while allowing traders to take advantage of potential reversals.
Position Sizing
Determine your position size based on the distance between your entry point and stop-loss level. A common approach is to risk only a small percentage of your trading capital – often 1–2% per trade. This ensures that even if the pattern fails, losses remain manageable.
Stop-Loss Placement
A stop-loss is usually placed just above the second peak of the double top. This protects against false breakouts and accounts for minor price fluctuations. For more conservative traders, placing the stop slightly higher than the recent swing high reduces the risk of being stopped out prematurely.
That saidd, we are no fans of an arbitrary stop loss. We prefer to trade many diversified strategies without stop losses. We trade small many different assets, different time frames, and different market direections (long and short). This way we diversify a lot of the risk.
Take-Profit Targets
The most common method for setting a take-profit is measuring the height of the pattern (distance from the peaks to the neckline) and projecting it downward from the neckline. This provides a realistic target based on the pattern’s structure. Some traders also scale out of positions, taking partial profits at intermediate support levels to reduce exposure.
Confirming Signals
Using volume, trendlines, or indicators like RSI and MACD can add confirmation and reduce the likelihood of entering a failed trade. A breakdown accompanied by high volume, for example, suggests stronger selling pressure and increases the probability of a successful trade.
Avoid Overtrading
Not every double top is worth trading. Focus on well-formed patterns with clear peaks, a valid neckline, and supporting confirmation signals. Ignoring weak setups reduces the risk of repeated losses and improves overall trading performance.
Is the double top pattern bullish or bearish?
The double top pattern is bearish. It is formed at the end of an uptrend and indicates a potential downward reversal, which is why it is considered a bearish reversal pattern.
How do you trade a double top pattern?
You can use the double top pattern as a warning to close a long position if you are a long-term investor. If you want to sell short, wait for the price to break below the neckline, and if you miss that opportunity, you can wait for a retest of the neckline, as you can see in the chart below:
You estimate the profit target by measuring the height of the pattern and projecting it downwards from the neckline. The stop loss can be in the middle of the pattern, which offers a better reward/risk ratio, or above the pattern, which offers a poor reward/risk ratio but appears safer.
Double top pattern trading rules (settings)
To summarize, here are the suggested trading rules for the double top pattern:
Trading Rules
- There must be an existing uptrend before the pattern appears
- Both swing highs should be within 3% of each other
- The price must break below the neckline on a huge volume
Psychological Pitfalls & Behavioral Biases
Trading double tops is not just about identifying the pattern; it also requires managing the psychological challenges that come with reversal trades. Even well-formed patterns can lead to mistakes if traders fall prey to common biases.
Confirmation Bias
Traders often see what they want to see. If you are bullish, you might downplay signs that the double top is forming or ignore weakening volume on the second peak. This bias can lead to entering trades too late or ignoring early warning signs of a failed pattern.
Fear of Missing Out (FOMO)
After the second peak forms, traders may feel pressure to act quickly, worried about missing the potential reversal. FOMO can lead to premature entries before the neckline breaks or before confirmation signals align, increasing the risk of losses.
Loss Aversion
Once in a trade, loss aversion can prevent traders from exiting when the pattern fails. They may hold onto positions hoping for a reversal back in their favor, turning a small loss into a larger one.
Overconfidence
Traders with a string of successful double top trades may develop overconfidence, taking larger positions or ignoring risk management rules. Overconfidence can amplify losses if a pattern fails or if market conditions are unfavorable.
Recency Bias
A recent double top success may make a trader overly optimistic about future setups. Conversely, a recent failure can lead to unnecessary hesitation, causing missed opportunities.
Please also read our complete guide on the trading biases.
Amibroker code for the double top pattern
To code a double top is hard. We have made the code to show the formations in the chart, and it can additionally be backtested with a few modifications. You can purchase the code together with lots of other code from our free and profitable trading strategies.
An example of how the code looks can be found here:
Double top chart pattern strategy (backtest and example)
To code properly to make a backtest of a double top pattern strategy is hard, complex, and time consuming. However, we are fortunate to have a book by Thomas Bulkowski called The Encyclopedia of Chart Patterns. It’s a bit old, published in 2000, but we assume chart patterns never go out of style.
Bulkowski is an engineer who wanted to build his trading strategy on scientific research rather than unquantifiable predictions. That’s why he wanted to go through all the major chart formations and quantify them over many years. He picked 500 stocks, not adjusted for survivorship bias, and looked manually at patterns over a period of 5 years. One of the patterns was the double top chart pattern.
We summarized his findings about the double top pattern in this table:
| Description | Statistics |
| #Formations among 500 stocks from 1991 to 1996 | 454 |
| Reversal or consolidation | 113 consolidations, 341 reversals |
| #False signals | 75 (17%) |
| Average decline of successful formations | 20% |
| Most likely decline | 10 to 15% |
| #Formations that reached the target | 177 (39%) |
| The average length of the formation | 57 days |
| Average price difference between tops | 1% |
A double top is a short strategy and shorting is very difficult – we have explained why shorting stocks is difficult in a previous article. Only 39% of the formations reach their target, a number that is much lower than the 68% for the opposite double bottom chart pattern strategy. The reason for the difference is simple: the stock market has a tailwind in the form of inflation and increased productivity. Please read our article about night trading strategies.
Bulkowski’s research gives us an indication of the double top pattern strategy, but it still involves a lot of human judgment. For example, all the chart patterns are manually detected and not scanned by precise buy and sell rules. Short-term trading is all about statistics and probabilities and thus you are a little blind if you rely too much on Bulkowski’s statistics (in our opinion).
Double Top Variants / Failures
Not all double tops look the same, and variations of the pattern can reveal additional information about market strength or weakness. Understanding these variants, as well as common failure scenarios, helps refine expectations and reduce false signals.
One variation is the uneven double top. In this case, the two peaks are not perfectly aligned; the second top may be slightly higher or lower than the first. A slightly higher second top can indicate an attempt to break resistance that ultimately fails, suggesting exhaustion. A slightly lower second top may signal that buyers could not even retest the previous high, which is an early sign of weakness. Both forms are valid as long as the general structure and neckline break occur.
Another variant is the extended double top. Here, the pause between the two peaks is longer than usual, sometimes lasting weeks or months. While the pattern still represents indecision and eventual reversal, the extended duration makes it more difficult to trade because the market may display several conflicting signals in between. However, extended patterns often carry more significance because they reflect a longer battle between buyers and sellers.
Failures are a crucial aspect of the pattern. A common failure scenario occurs when price forms what looks like a double top but quickly reverses upward after breaking the neckline. This traps short sellers and leads to a continuation of the original uptrend. Such failures often happen in strong bull markets where upward momentum overwhelms technical setups. They can also occur when the neckline break happens on very low volume, indicating a lack of conviction behind the move.
Another failure occurs when the pattern takes shape but price never breaks the neckline. In this case, the market simply consolidates before eventually pushing through resistance and making new highs. What looked like a potential reversal turns into a continuation pattern instead. Traders who anticipate a breakdown too early may find themselves caught on the wrong side of the trend.
Understanding these variants and potential failures helps place the double top in a broader context. No pattern works perfectly, and recognizing the signs of weakening setups or false signals improves decision-making and reduces the likelihood of being caught in a premature trade.
Double Top vs Other Reversal Patterns
While the double top is one of the most recognizable reversal patterns, it is important to understand how it differs from other common reversal setups. Comparing these patterns can help traders choose the right signals and avoid confusion in volatile markets.
Double Top vs Head and Shoulders
Both patterns indicate a potential trend reversal, but there are key differences. A head and shoulders pattern has three peaks: a higher middle peak (the head) flanked by two lower peaks (the shoulders). It often provides a clearer structure for placing stops and measuring targets. Double tops, by contrast, have only two peaks and can be slightly less precise in predicting the extent of the reversal. Head and shoulders are generally considered more reliable in longer-term charts.
Double Top vs Triple Top
A triple top is similar to a double top but with three peaks at roughly the same level. It signals even stronger resistance and often indicates a more pronounced reversal. However, triple tops take longer to form and are less common. Double tops are more frequent and provide earlier entry opportunities, though they may also produce slightly more false signals.
Double Top vs Rounding Top
A rounding top is a gradual, curved reversal pattern that forms over a longer period. It indicates a slow shift from bullish to bearish sentiment, unlike the more abrupt shift seen in double tops. Rounding tops are better suited for identifying long-term trend exhaustion, while double tops are useful for medium-term swing trading.
Double Top vs Flag or Pennant Reversals
Flags and pennants are continuation patterns, not reversals. It’s important not to confuse a consolidation at a peak with a true double top. Double tops show a clear failure to break resistance and a subsequent breakdown of the neckline, whereas flags and pennants generally resolve in the direction of the prior trend.
Double top chart pattern strategy – ending remarks
Generally, we believe shorting the stock market is a futile idea (most of the time) because of the tailwind from rising stock prices. It’s only during brief periods of time that shorting is profitable (when the market falls hard and fast). These occasions are far between. Thus, we believe the double top chart pattern strategy is a pretty tough formation to trade.
FAQ:
– How do you identify a double top pattern?
The double top pattern is identified by two swing highs at approximately the same level, forming a resistance level. A neckline, formed by connecting the swing low to the preceding swing low, serves as support. A break below the neckline suggests a potential downward reversal.
– Is the double top pattern bullish or bearish?
The double top pattern is bearish. It occurs at the end of an uptrend, indicating a potential reversal and a likely downward movement in prices.
– What are the trading rules for the double top pattern?
Trading rules include identifying an existing uptrend, ensuring both swing highs are within 3% of each other, and waiting for a significant volume break below the neckline for a valid trade signal.