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The Double Top Whose Numbers Do Not Work

Price makes a peak at 1.2000, drops to a trough at 1.1900, rallies to 1.1995, and fails. A trader sees a double top and wants to sell the neckline break at 1.1900.

Compute the textbook target. The pattern's height is 1.2000 minus 1.1900, which is 100 pips. Projected down from the neckline: 1.1900 minus 100 pips is 1.1800.

Compute the stop. A logical stop sits above the second peak and the first, say 1.2005. From an entry at 1.1898, just after the break, the risk is 107 pips.

Reward is 98 pips. The ratio is 98 divided by 107, about 0.92. The trade risks more than it can make, even if the target is hit exactly.

So the pattern may be real while the trade is not worth taking. What are the options? Wait for a retest of 1.1900 from below. Entry at 1.1900 changes the numbers only slightly: risk 105, reward 100. Still below 1. Use a tighter stop, such as just above the retest high at 1.1925: risk 25, reward 100, ratio 4. That works if the retest rejects cleanly, but it requires patience and a different trigger.

The lesson is that the stop distance in a wide pattern is large, and the entry on the break gives away the best part of the move.

Your turn: for any pattern you trade, compute the ratio at the break and at the retest, and see which one you are actually taking.

Fairman, the double top example shows why the textbook target needs a sanity check. A 100 pip target from the neckline might be far beyond the typical daily range, which makes it unlikely to be reached within a reasonable time. Comparing the target with the average range first helps decide whether the pattern is tradeable at all. The alternative is to keep the pattern but scale the target to something like the average daily range from the break.

I fell into this exact trap for a long time with head and shoulders patterns on GBPUSD H1. The pattern looked perfect, I sold the neckline break, and the stop above the right shoulder was so far away that I had to take a tiny position. When I finally worked out the reward against risk for my last twenty or so of those trades, the average was below one, just like your example.

The retest entry changed things for me, but it comes with a cost you only see in the journal. In my records only about half the breaks came back to retest the neckline. The ones that did not were often the strongest moves, so waiting meant missing some of the best trades completely.

What I settled on is a smaller position on the break with the wide stop, and a second piece on the retest with a stop just above the retest high if it happens. The combined risk stays within my normal limit, and I am not left watching a clean move without being in it.

The numbers make the problem clear. A 107 pip risk for a 98 pip reward gives a ratio below 1, which needs a win rate above about 52 percent just to break even before costs. Double tops are commonly cited as reliable patterns, but even a reliable pattern can't make up for a poor ratio. The issue is that the logical stop sits above both peaks, a long way from the neckline, while the textbook target is only the pattern's height. So the structure of the pattern itself produces a ratio near 1 for neckline break entries, which is easy to overlook when the pattern looks convincing.

The retest entry with a tighter stop is the most practical alternative. If price breaks the neckline, then pulls back to 1.1900 and rejects with a stop above the retest high at 1.1925, the risk is 25 pips for the same 100 pip target, a ratio of 4. The catch, as the post notes, is that the retest doesn't always happen, and when it does, the tight stop may be hit by a deeper pullback. Recording how often retests occur after neckline breaks, and how often they hold, would show whether this approach works in practice on the pairs being traded.

Another option is to enter at the second peak rather than waiting for the neckline break. If price rallies to 1.1995 and forms a rejection candle, a short with a stop above 1.2005, risking about 10 pips, and a target at the neckline 95 pips away gives a ratio above 9. But at that point, the double top isn't confirmed, and many second peaks become a breakout instead. The win rate would be lower, but the ratio much higher. Each entry point offers a different balance of confirmation and ratio, and testing each on past examples shows which balance suits the trader best.

Computing the ratio at the break and at the retest for any pattern, as the exercise suggests, is a good discipline. Many traders discover that their favourite patterns have poor ratios at the standard entry point, and that their results come from the trades where they entered early or on a retest. Has anyone here compared break and retest entries on double tops or head and shoulders patterns? I'd be interested in how often the retest happened and whether the better ratio made up for the trades that never came back to the neckline.