A double top is more a sell setup than a signal but it can be used both ways. It is formed when the price peaks above the upper Bollinger band and then a subsequent peak develops that stays below the upper band. This bearish setup is confirmed when prices start declining, and an even better indication will be the point where the price crosses below the middle band.
Figure 9 – Examples of double top sell setups using the USD/JPY pair.
In the above figure, there are three instance of this chart formation. The values of the signals vary, but all of them were able to foretell the upcoming downtrends.
- In early August, the double top setup foreshadows a downtrend that lasts for 8 trading sessions.
- In early October the double top setup turns out to be a great signal. The ensuing fall of the Dollar, if a trader was using the middle band as confirmation lasts almost two months and garners almost 700 pips.
- Hopefully the one (blue) close in November that pushed the price above the middle band was not acted upon as it seemed to be uncharacteristically high in volatility for that period, and turns out to be a whipsaw.
- In mid-December/January another double top forms as a precursor to the 5 session downtrend that follows. This contraction of the Dollar only lasts until the price action touches the bottom band.
