Double Top Chart Pattern Forex Trading Strategy

The pattern often indicates that the market has bottomed and is about to move higher. As the double top is formed at the end of an uptrend, double top pattern forex strategy the prior trend should be an uptrend. Traders should spot if two rounding tops are forming and also note the size of the tops.

There is a significant difference between a genuine double top and one that has failed. A failed double top chart pattern is formed when the anticipated market direction doesn’t develop as expected. A real double top, on the other hand, will indicate undeniably bearish conditions, signaling the potential steep drop in the price of a particular asset. A trailing stop allows you to set a large target and helps prevent unrealized profits from turning into losses.

How to Trade the Double-Top Pattern

According to the double top pattern trading rules, short trades should be opened after a test of broken out support. The profit target is determined by the distance from the tops to the neckline, that is, traders can immediately determine the further movement. However, when important news is published, and in other cases, quotes drop even lower.

When the price action approached the second peak, it dropped immediately. This shows that the buyers are exhausted, and sellers took over the show. At the same time, we can also see the RSI giving a sharp reversal in the overbought area. In this strategy, we have paired the Double Top pattern with the RSI indicator to identify accurate shorting signals. As you might have probably known, RSI stands for the Relative Strength Index.

• A double-top pattern is among the most popular charting patterns to identify oversold and overbought markets.
• If there is no significant support area for you to exit your positions, you can close them when the RSI reaches the oversold area.
• Be mindful that every instance of a double top may be slightly different, and false signals may lead investors to believe a double top is forming when it isn’t.
• Not only is it not complete, but attempting to enter before having a confirmed setup can get you in a lot of trouble.
• This means the trader is selling their holdings at the current price and hoping to make a profit.

After a strong uptrend, the pattern forms two highs at the same resistance level. In some cases, the second high may be slightly higher than the first. At the same time, an intermediate downward correction can be seen between the two tops, which makes the pattern look like the letter M.

Double Top Pattern: A Forex Trader’s Guide

You must follow all the above steps to identify double top a trend reversal pattern. To detect a double top or double touch, you need to find out a good Resistance level. When the price bounces back a second time from a Resistance Level then it is called a double price top. It means the resistance level is strong and it is not allowing the price to break the resistance level.

Double top vs. double bottom pattern

Prudent traders should avoid going short in anticipation of this neckline break and instead patiently wait for the breakout to occur. Leaving the trade early may seem prudent and logical, but markets are rarely that straightforward. The net effect is a series of frustrating stops out of positions that often would have turned out to be successful trades. Plus, there’s often a definite resistance level that is formed when two peaks at roughly the same price level appear consecutively. This level can be used by traders as a benchmark for establishing stop-loss orders and profit objectives, improving risk management, and trade planning. Following a downtrend, a double bottom is a bullish reversal pattern.

How to trade a breakout test of Double Bottom and Double Top?

The double top pattern consists of two consecutive peaks of similar height, with a trough in between. The price reaches a high point, retraces, and then attempts to reach a new high but fails, forming the second peak. This failure to break the previous high indicates a potential trend reversal. The double top is one of the most popular technical analysis patterns used by forex traders.

Their stop loss orders add further selling pressure — which increases the probability of success. The four standard deviations cover more than 99% of all probabilities and therefore seem to offer a reasonable cut-off point. More importantly they work well in actual testing, providing stops that are not too tight, yet not so wide as to become prohibitively costly. Notice how the second bottom wasn’t able to significantly break the first bottom. Notice how the second top was not able to break the high of the first top.

By solely relying on the formation of two successive peaks to define a double top, you might end up with an inaccurate reading and premature exit from your position. It is formed when the price of an asset reaches a peak two consecutive times with a moderate decline between the two. It is confirmed once the price falls below a support level equivalent to the low between the two previous peaks. Once the pattern is confirmed, a sell entry point can be set when the price crosses the low between the two tops. The stop loss point can be set at a level above the second peak, and the profit point can be set below the first peak.

So in essence, the Double Top chart pattern signals a possible trend reversal as the market is unable to move higher. It’s possible that not all double-top patterns have exact symmetry or the same peaks and troughs. The pricing ranges, length of time, and shape of the design are all flexible. It can be difficult to precisely specify the entry and departure locations or establish the pattern’s target levels because of this variability. Last, by spotting a double-top pattern, traders can determine their profit goals and determine the probable downside target depending on the pattern’s height.

The breakout of the intermediate support line predetermines a further decline. The profit target is calculated by the distance from the resistance level to the neckline. In some cases, the second peak may be slightly higher or slightly lower than the first. Bull traps often occur at resistance levels, causing traders to open long positions. A double top occurred in the chart before the big sell-off in the US stock market in 2000. As you can see below, the instrument’s quotes fell even lower than the expected target.

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