|
Written by and copyright © 2005-2009 by Thomas N. Bulkowski. All rights reserved.
During research for my book,
Encyclopedia of Chart Patterns, Second Edition  (pictured on the right),
I uncovered many facts about double tops. I discovered that they fail 65% of the time, but that rate is deceiving. If you look at any twin peak pattern, price will fail
to close below the valley formed between those two peaks 65% of the time. Price rises instead of dropping.
Adam is a term that describes how the top looks, in this case, a narrow, pointed top, perhaps with a one-day upward spike. Eve tops are more rounded looking and wider. If they
have spikes, they tend to be more numerous and shorter. Many times the difference between Adam and Eve is the width of each over their entire height. Adam tops tend to remain narrow but
Eve tops widen over their height. When trying to decide which is which, ask yourself if the two tops appear different or similar. With Adam & Adam, the two should look
similar (both narrow).
|
If you wait for price to close below the valley (the so-called
confirmation price) then the pattern performs quite well. In fact, the Adam & Adam double top is the second best performing combination
of Adam and Eve double tops (second only to Eve & Eve double tops). The average decline in
a bull market is where the Adam & Adam double top shines. For more information, see pages
275 to 290 of Encyclopedia of Chart Patterns, Second Edition and the following...
|
|
Important Bull Market Results
|
Overall performance rank (1 is best): 4 out of 21
Break even failure rate: 8%
Average decline: 19%
Pullback rate: 61%
Percentage meeting price target: 72%
|
 Adam & Adam Double Top |
|
Identification Guidelines
| Characteristic | Discussion |
| Price trend | Upward leading to the pattern. |
| Shape | Two distinct tops that look similar, usually twin spikes poking above the surrounding price landscape. Adam tops are narrow, inverted V’s. |
| Valley | The valley drop between the tops should measure at least 10%, but allow exceptions. |
| Top price | The variation between price peaks is small, less than 3%. The best performance comes from peaks less than 6% apart. The two tops should appear to peak near
the same price. |
| Separation | The twin peaks are usually 5 to 7 weeks apart. Wider than 8 weeks and performance deteriorates. |
| Confirmation | The double top confirms as a true double top once price closes below the valley between the two peaks. |
| Volume | Usually higher on formation of the left peak than the right, and trends downward. |
Trading Tips
| Trading Tactic | Explanation | 
The Measure Rule |
| Measure rule | Compute the height from the highest peak (point B in the
figure to the right) to the lowest valley (A) between the two peaks and then
multiply it by the above “percentage meeting price target.”
Subtract the result from the breakout price (A) to get the target (C). Also, see
the double top study. for a new price prediction method. |
| Stop | Place a stop loss order a few pennies above the highest
peak (point B in the figure to the right) in the double top chart pattern. If that is too far away, then consider a volatility stop. |
| Price velocity | A study concludes that a high velocity move leading to the chart pattern results in a high velocity move after the breakout. |
| Price reversal | Price must have something to reverse, so if the rise leading to the double top is small, expect a small decline. |
| Confirmation | Wait for confirmation – price
to close below the valley floor (point A in the figure to the upper right). If you
don’t wait, there’s a 65% chance that price will continue higher without
confirming the double top. |
| Trend end | If a double top appears after a
long-term DECLINE, confirmation of the top may mean that the end of the decline is
near (10% to 20% below and a month away). |
| Trends | Avoid a long term trend leading
to the pattern as those produce the smallest declines post breakout. |
| Yearly high | For best performance, double tops
with breakouts in the highest third of the yearly price range perform best, but the
performance difference between the other ranges is small. |
| Volume trend | A downward volume trend results
in the best post breakout performance. The link to the left shows an example and
lists other chart patterns that do best after a downward volume trend. The
following link
provides performance statistics. |
| Pullbacks | Pullbacks hurt post breakout
performance. The link to the left defines pullbacks and the following
link discusses
performance. |
Example
The figure to the right shows an example of an Adam & Adam double top chart pattern. The two Adam tops are narrow
peaks with a good decline between them (point B) and they appear after an upward price
trend. The Adam & Adam double top confirms as a valid double top when price closes below point B, shown as the horizontal blue line.
To calculate a price target, subtract the price of valley B (the lowest valley between
the two Adam tops) from the higher of the Adam peaks (A). That finds the height. Multiply
the height by 72% (the percentage
meeting price target from Important Bull Market Results table near the top of this page) and subtract the result from
B. That gives a target shown as a red horizontal line on the
above chart (point C).
Other Examples
-- Thomas Bulkowski
|
. If you buy ANYTHING, they pay for the referral.
on 
