April 12, 2019

Double Top Pattern – Backtest Rules & Results

The double top pattern is a chart formation consisting of two consecutive price peaks that leads to a bearish reversal.

For years, traders have claimed that the double top is a high probability short setup.

This is because a double top pattern signifies that bulls are having trouble pushing the price past the prior high.

However, there has been little statistical research done to prove whether or not this pattern has any predictive ability.

In this article, we come up with a definition for the double top, code it up and test the pattern on some historical data.

1. Define The Double Top Pattern
Before we go any further it’s important to think about what a double top actually is and how we can write it into code.

This always presents a problem with chart patterns because they only become clear after the pattern is completed.

For example, a double top pattern only looks like a double top after the stock hits a high then drops through the accompanying support area.

If the stock doesn’t drop fully, then it will look more like a wedge or a triangle pattern.

If the high doesn’t hold long enough then the double top pattern very quickly looks nothing like a double top at all and instead morphs into a typical breakout.

Because of this, it’s essential to come up with a mathematical formula to represent a double top.

Read more at https://jbmarwood.com/double-top-pattern/

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