The second method traders use to trade the double top chart pattern is the pullback trading entry method.
So, what is the pullback trading entry method?
This entry method implies waiting for the market to retrace to the neckline after breaking below it.
Let me show you an example with this GBP AUD H1 chart below:
Notice that the market was trending up and later formed a nice double top pattern, indicating a potential bearish reversal.
The breakout of the neckline is a good opportunity to enter the market, but if we are conservative traders, we may want to get more confirmations.
So, we can wait for a rejection of a pullback to the neckline after the breakout.
Look at what happened next in the chart below:
As you can see, after the breakout of the neckline, the market retraced to retest the neckline, which has now become a resistance level.
At the neckline, it formed a bearish engulfing bar candlestick pattern.
This bearish reversal candlestick pattern at the neckline indicates that the little attempt by buyers to push the price back up was rejected, as sellers took charge, ending the retracement move and starting a new impulse move downward.
So at this point, we have four important elements that encourage us to short the market:
- The formation of the double top
- The breakout of the neckline
- The pullback to the neckline
- The formation of a bearish candlestick pattern signal (bearish engulfing bar)
Now, let me show you how to place your entry, stop loss, and profit target.
Look at the chart below:
As you can see from the chart, you place your entry at the close of the bearish engulfing bar, your stop loss above the upper shadow of the engulfing bar, and your profit target at the next support level.
I marked two profit targets because there are two levels that the market can reach if it moves downward.
So, it is up to you to decide whether to choose the first profit target or the second one.
No one will teach you which one to choose, as you will only learn that from experience, but as a beginner, I recommend you look at the first major level and place your profit target just above it.
Now, look at the chart below to see what the market did next:
As you see, after the formation of the bearish engulfing pattern, the market went down and reached the first and second profit targets.
Let’s look at another example with this GBP/AUD H1 chart below:
As you can see, the market was initially dominated by the bulls, but later, it formed a nice double top pattern, indicating that sellers were beginning to challenge the buyers.
Now, see what happened next:
As you can see, the market broke below the neckline and later retraced to retest it.
The formation of the bearish engulfing bar pattern indicated the end of this retracement and the beginning of a new downward move.
Look at the chart below to see how we place our entry, stop loss, and profit target:
You can see that we placed an entry immediately after the bearish engulfing bar broke below the support level.
We entered this way because the engulfing bar is a big candle and if we wait for the candle to close, we will have a poor reward/risk ratio.
The stop loss should be placed above the engulfing candle, while the profit target should be just above the next support level.
Of course, it’s not only the engulfing pattern that you use; you can use different reversal candlestick patterns, such as pin bars, inside bars, and dojis, as the entry signal.
Let me give you another example on a different timeframe.
See the EUR/AUD daily chart below:
As you can see, the market was trending up, making higher swing highs and higher swing lows.
However, the formation of the double top chart pattern indicated that buyers were getting exhausted, giving sellers the opportunity to push the market lower.
The breakout of the neckline confirms the validity of the double top chart pattern.
While we can enter directly after the breakout, we can decide to wait for a short retracement back to the neckline since we have learned how to use a pullback as an entry method.
Look at what happened next .
As you can see, there were short retracements to the neckline, which were rejected by sellers, giving rise to multiple doji candlestick patterns.
To enter the market, you can place an entry order at the close of any of the doji candlesticks that formed the minor pullbacks.
Your stop loss should be placed above the upper shadows, while the profit target should be placed just above the first support level or the second one.
As a beginner trader, it is highly recommended to place your profit target just above the first support level.
Advantages and drawbacks of trading the double top chart pattern pullbacks
One of the advantages of trading the pullback after the breakout of the neckline is that this entry technique gives us a good reward/risk ratio.
When we wait for a pullback, we can have a tight stop loss and a bigger profit target.
This approach is highly recommended for conservative traders who don’t like to take bigger risks.
However, the drawback of this method is that sometimes the pullback does not happen, as the market moves down strongly after the breakout of the neckline.
In such situations, if you wait for the pullback, you will miss a lot of trades and feel disappointed as a result.
I am not here to tell you that trading the breakout directly is better than waiting for the pullback.
Some traders trade the double top pattern breakout successfully, and many other traders trade the pullback successfully as well.
I don’t really want you to ask me which one to choose; you are the only one who can decide the entry method that suits you best.
However, if you are a conservative trader, you will always feel like you need to wait for a pullback, and that is fine.
On the other hand, if you are an aggressive trader, you will like to enter immediately after the breakout.
Now, you may be wondering whether you are a conservative trader or an aggressive trader.
The truth is, nobody can give you the right answer, because nobody knows you better than yourself.
Open a demo account and start practicing these strategies. From there, you can learn more about yourself to know the type of trader you are and the trading method that is best for you.
Conclusion
In this post, I have shown you another method of trading the double top pattern. This method is more suitable for conservative traders.
You can learn other interesting strategies from our free Telegram channel where we interact and share more knowledge. In the channel, I give out 2 to 3 live Forex signals per week for free.