The double top chart pattern is a reversal chart pattern that can be seen in all timeframes. If often forms when price has moved up for an extended amount of time. The tops or peaks or swing highs are formed when price hits a certain resistance levels where it cannot break it to the upside.
Timeframes: preferably 15mins and above
Currency Pairs: Any
Forex Indicators: None required
Anything Else You Need?: Know how to identify Bearish Reversal Candlesticks
HOW TO IDENTIFY THE DOUBLE TOP FOREX CHART PATTERN
It is not complicated issue to identify a double top chart pattern. What you need is only two things(or 3):
- Two tops, top1 & top2 (or swing highs or peaks )that are almost on the same price level.
- There should be equal distance in terms of time it takes to form the highs(peaks)
- Some forex traders like to include a third requirement to classify a double top: volume. They want to see a decrease in volume on the second high. This give them added confidence that the buyers are losing steam!
Lets look at the chart above carefully:
- Notice that two tops or peaks were formed after a strong move upward.
- Notice also that the second top or swing high (or peak) was unable to break the second top or swing high(top2).
- When price does not break this resistance level above top2, this is a strong indication that a reversal is going to occur.
- Now, you can use volume as a further confirmation to see if buying pressure is decreasing as well.
As a forex trader, once you see all these things lining up, you know you are should take your trade because price usually moves fast downward once top 2 resistance level is not broken to the upside.
HOW TO TRADE THE DOUBLE TOP CHART PATTERN FOREX TRADING STRATEGY
Trading the double top forex trading strategy is really simple and there are three ways to trade it and here they are:
- The Aggressive Entry
- The Reversal Candlestick Entry Technique &
- The Conservative Entry
Here Are the Rules of The Aggressive Trade Entry:
- Once the first top is formed and now you see price going back up to that level…
- Place a sell limit pending order just 3-5 pips under the high of the candlestick the formed the Top1. Or you can also sell instantly at market order as soon as price is within 3-5 pips of the high of Top1 candlestick.
- Place your stop loss at 10-30 pips above the high of top1 candlestick.
- For your take profit targets, you can use the neckline as your take profit target level 1 and or even use the previous swing low below the neckline for your take profit target.
Here Are the Rules of The Reversal Candlestick Trade Entry:
- Once the second top is formed, what you do is watch for a bearish reversal candlestick formation.
- Place a sell stop order just 3-5 pips under the low of the bearish reversal candlestick formation.
- Place your stop loss at either a few pips above the bearish reversal candlestick formation, 5-10 pips or you can place it just a little bit outside of both the 1st top and the 2nd top, anywhere from 5-20 pips.
- For your take profit target, you can use the neckline as your take profit target level
Here are the rules of the Conservative Trade Entry:
- Wait for price to break below that neckline. Make sure the candlestick that breaks the neckline must close below it.
- Then place a sell stop order 3-5 pips under that breakout candlestick’s low.
- Place your stop loss anywhere from 3-10 pips above just above the neckline or just above the high of the candlestick.
- For you take profit target, calculate the distance in pips between the neckline and the 1st top (or the second top…whichever you prefer) and use that number to project your take profit target price level.
But here’s the problem I see with trading using the conservative approach:
your stop loss would be too large if the neckline is too far away from the tops.
ADVANTAGES OF THE DOUBLE TOP CHART PATTERN FOREX TRADING STRATEGY
- The downward moves that happen after the formation of the 2nd top can go a long way, even for weeks, if you are trading off the daily chart and if you continue to ride the trend, that’s means you make lots of money too.
- This is price action trading at its best too.
- Easy to spot and trade once you know what to look for
- The risk for each trade is much better compared to other forex trading strategies simply because you will be using support and resistance levels to place your stop loss.
- What this means is that there is less chance of you getting stopped out frequently.
DISADVANTAGE OF THE DOUBLE TOP CHART PATTERN FOREX TRADING STRATEGY
- Sometimes you will come across situations where there will be price spikes just to trigger all the stop losses placed just above top1 and it would seem as there would be a breakout to the upside but this is just a trick. Later you will see price fall back all the way down. (The key is being vigilant and if a price spike takes you out with loss, then watch and wait to see if you enter on the 2nd time…just wait for another reversal candlestick…even if it is the spike candlestick, enter again!)
- Trading in smaller timeframes anything below 1hr may not be really good. The higher the timeframes you use, the better.
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