There are multiple variations of this pattern that revolve around the shape and size of the peaks or trough.
The below example is a Adam and Eve top with the first peak with straighter edges and a sharper top followed by a rounded top.
Prior Trend – When looking at reversal patterns you will first need a trend which can be seen at the start of the chart which above shows a strong positive trend. You also need this original trend to be in place for a couple of months.
First Peak – This should mark the high point of the initial trend.
Trough – After the first peak there will be a slight decline of 10-20% which should consolidate a few month period.
Second Peak – This will occur when the price comes off the lows of this movement until it meets the same resistance level as before. Once you have a second top you still need to wait for confirmation. Although the perfect pattern both tops are at the same level this is rarely the case but the peaks should be within 2-3% of each other.
Decline from Peak – During the decline, you should have an increase in volume or an accelerated decline as shown above. This shows that the demand is weaker than supply and the support level will soon be tested.
Support Break – Until the support is broken the pattern is not in play. Once the support is broken this is a confirmation or the pattern and in the case above you will want to sell at this level.
Support into Resistance – Once the price has moved through the support level, this will then become the resistance level and a reaction rally may test that level before it continues the decline.
Price Target – One of the most important parts of the pattern is to look at where the price will go. Generally, the distance from the support break to peak can be subtracted from the support break for a potential prices target. This would mean that the bigger the trough the larger the potential movement.
The below chart shows a classic double top in GBPJPY with a strong starting uptrend into the first red top. The pullback is within a small 15% range before forming the second equally high peak. Sterling then weakens and breaks through the neckline created by the pullback. A sell stop would be placed under the neckline to capture the following drop.
Although this pattern looks very straight forward you need to be careful to mind for deceptive patterns. The peaks should be separated by at least a month as if they are two close they could just represent a normal resistance point and not a change in the trend.
Also when trading this pattern, you want to make sure you do not get into a trade before the confirmation has taken place of the end to the pattern when the price moves below the resistance level. The break also needs to be convincing with trading taken below the level for around 3 days before you would consider it Valid.
The reverse of this pattern has a strong downward trend with two matching lows. The price then has a quick rebound off the neckline which is subsequently broken. The retest goes through the neckline which is why you will want to build a little room when setting stop loss as chart patterns are rarely perfect and have a degree of variability.
As the name implies the pattern is made up of two consecutive peaks with are roughly equal and a trough between them leading to a reversal in price. There can be a few variations of this pattern but generally, it marks an intermediate change from bullish to bearish. The signal is only confirmed when the price drops back below the resistance level. This resistance level will be the low of the trough between the two peaks.