Double Top Pattern in Forex is a Bearish Reversal Pattern that occurs after an extended uptrend.
It is one of the most traders’ favorite pattern. It is easy to spot on the chart and forms more often in the market.
In this lesson, we shall explain the double tops and how to trade using them.
What is a double top pattern in forex?
A double top pattern in forex is a bearish reversal trading pattern.
It comprises of 2 peaks above a support level(the neckline).
The first top forms immediately after a strong bullish trend, price then retraces to the neckline.
Once it hits this level, the momentum will shift to bullish once again to form the second top.
When it bounces back to the neckline again, it then forms a double top.
Usually the volume is high on the first peak then it reduces as the pattern forms and again increases as the pattern completes the formation.
The tops are usually in the same zone and so can be joined with a line to form a resistance and the lows joined form a support.
This pattern normally appears after a strong uptrend move.
After the confirmation of the pattern, the trend is likely to reverse.
The pattern is complete when price breaks the lows or support line.
As the price breaks the support line , we expect a change in the previous trend.
Confirmation of a Double Tops
The support level commonly referred to as the neckline acts as the trigger line for the confirmation and entry-level in the direction of the reversal breakout.
It is drawn by joining the lows of the first top and the second top of the pattern.
When a bearish candlestick breaks and closes below the support line, the pattern has confirmed the sell signal.
Although the pattern is easy to spot and fairly easy to trade, you cannot simply jump into a trade whenever you see two tops on the chart.
2 things you must consider to confirm the validity of this pattern;
- The Neck Line
- Breakout candlestick.
The Neck Line
Draw a horizontal line from the first low of the first top and project it to the last low of the second top.
This gives you a support/ neckline. Though sometimes it may not be a perfect horizontal line.
Breakout on the Neckline
The pattern is valid when the price action breaks the Neck Line with a bearish candlestick closing below.
You can also consider a price retest after the break for extra confirmation. Then trade the pattern in the direction of the breakout.
Let us look at a few examples on how to trade double top pattern in forex
How to trade double tops
Now we already know how to identify a double top on the market chart and how to confirm a valid pattern. let’s dig in and start trading.
Steps to follow:
- Identify a prior trend, a bullish trend.
- You have spotted the two tops in the uptrend. Draw the Neck Line
- Confirm the validity of the pattern. Wait for the Neckline Breakout. If the price closes below the Neck Line with a bearish candlesticks, we confirm the validity of the formation.
- Take the Sell
However some traders prefer a price retest after the price break on the neckline. This is a second entry confirmation. Just to be more sure about the price breakout
Stop loss and Take Profit Levels
Put your stop level just above the lower top (1st or 2nd) of the pattern. If both tops are on the same peak level, put your stop level lightly above the tops.
For take profit, measure height of the pattern from the neckline to the highest top and then apply it downwards starting from the Neck Line. This would be your minimum target profit.
Take a look at the chart below
Trading Double Tops on a chart.
Example 1: EURAUD Daily Chart
You notice that after the break through at the Neck line, the price first retested the support level/ neckline as resistance. So you can take the trade on the break or you can wait for a retest
But as you wait for a retest, take note of presence of any reversal candlestick patterns at this level. This gives stronger signal on the retest
Example 2: GBPUSD Daily Chart
In this example , entry, Stop loss and profit Target criteria are the same as above.
With a high volatile market you can set a target which is equal to twice the size of the pattern and set your trailing stop just above your first target .
This means, If the price action continues to suggest more downside, you can trail your stop and aim for second larger target just like on GBP/USD, Daily chart below
NB: The larger the space between the tops, the stronger the pattern and the more likely to perform better i.e make a larger reversal.
How long you can hold an open position in forex, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer,...
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