Trading the Double Top Pattern

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As with the other reversal patterns, the support line of the Double Top pattern provides the trader with three critical pieces of information.

  1. It tells where to enter the trade (i.e., the breakout point).
  2. It is used in the calculation of the minimum price objective for closing the trade.
  3. It is used in the calculation of the stop-loss level.

Once the support line is decisively penetrated to the downside, CPR issues a sell-short signal at the open of the next day. The minimum downside price move is projected by measuring the height of the first top to the support line and projecting half of this distance downward from the breakout point. The maximum downside price move is the low of the bar at the start of the prior uptrend.

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If the minimum price objective is not met within a specific time period or if prices rally above the neckline then the pattern is cancelled. While classical chart pattern analysis does not suggest this (only CPR), the minimum time period for the pattern to breakout is equal to the distance from the first peak to the second peak projected from the second peak. The maximum time period for prices to reach the minimum price objective is equal to the distance from the first peak to the second peak projected from the breakout point.

The min/max price objectives and stops are provided in the Expert Commentary (see page 27). Visual and audible Expert Alerts will also pop up and alert you on the breakout and exit days.

Double Bottoms

The Double Bottom is simply an inverted image of the Double Top. The formation of this pattern occurs exactly the same as the Double Top pattern except it is preceded by a downtrend. It marks the transition period at the end of a downtrend and the beginning of an uptrend.

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All other points about the Double Bottom pattern are the same as the Double Top.

 

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