Volume 9
Chart Patterns: The Double Top





2/2/22



Being a proponent of one-line trading, EMA crossovers, and the Opening Range Breakout, I don’t utilize chart patterns all that much. However, there are certainly famous patterns I do use when looking for setups. And there are a small number that I think the beginning scalper / daytrader should take the time to learn. This volume briefly examines one of the most famous: the double top.


Every now and then when I am out perusing the mean charts of the market intraday, I see certain patterns and chart setups that make me pause and take heed. The double top is one of those. A few sessions ago, I observed one that seemed to be developing in the (now completed chart) below:





Be aware that this is a useful and not-very-sophisticated trade set up. Investopedia describes the double top as a “an extremely bearish technical reversal pattern that forms after an asset reaches a high price two consecutive times with a moderate decline between the two highs.” Be aware that it is very easy to identify patterns in completed charts after-the-fact. As is the case with all chart patterns, you have to wait for confirmation. The double top is confirmed, again per investopedia, “once the asset's price falls below a support level equal to the low between the two prior highs.” The key to making these patterns work in real time is waiting for confirmation. And, even better, pattern confirmation combined with an increase in relative volume is always even better. After all, traders can draw any sort of lines anywhere on any charts. Many a trader has been disappointed seeing their charting gone awry by the unexpected news item, unknown market event, or simply inaccurately drawn patterns.


So, if you get the double top confirmation it is probably that price action will descend for a few candles. I liked three things about this particular setup. I liked 1)that the neckline was coinciding with a breach of the 34 EMA, 2) this area also coincided with an ORB fib level (the red dotted line), and I liked that 3) volume was increasing as it approached the neckline.


In my opinion, this was a strong set up good for at least several candles so I went in with a relatively large position. Note that some traders only use the term “neckline” to describe the support level for the Head and Shoulders pattern. I use it for the double top as well. It makes sense to me, and I am iconoclastic like that!


But be aware, that I am confident in my exiting skills at this point and if the trade had went against me, pretty much at all, I would have stopped out for a very small loss. The intention was to lightning scalp this set up…I only needed three or four candles with volume for it to work. The trade thesis played out, and I exited upon the flattening of the HA candles and the fact I was happy with the profit.


My holding time was 3.5 minutes. The percentage gain was relatively small, but the larger position size made this a very nice gain.


However, if you are newer to scalping, or trading in general, keep your position sizing small. Small. Small.


In fact, I think this might be the sole focus of next week’s volume 10.


So, happy trading, keep those position sizes small, and keep at it.


-River


Follow River on Twitter @GreatRvr