A double top is one of most frequently traded patterns by most traders and is easy to spot on the chart. It is a bearish reversal pattern that forms in an upward movement.
The double tops are formed when prices are moving up and hold at certain levels bounce back and raises again retesting the same price level where it held first. When it bounces back, 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.
The pattern is considered complete when price breaks the lows or support line. As the price breaks the support line , we expect a change in the previous trend.
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 candle breaks and closes below the support line, the pattern has confirmed the sell signal
After entry, your stop-loss level should be set just above the lower top (1st or 2nd) of the pattern.
The profit target level is got by measuring the height of the pattern (distance from support line to the top) and then projecting that same distance forward from the support line to the downside as shown on the chart below.
Let’s take look at another example,
In this example, entry, Stop loss and profit Target criteria are same as above. With a high volatile market you can set a target which is equal to twice the size of the pattern and trailing your 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 GBPUSD, 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 should hold an open position, 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, this...