In forex trading, chart patterns play a significant role in technical analysis. A chart pattern is a distinct formation on a price chart that indicates a possible trend reversal or continuation. There are numerous chart patterns that traders use, and one of the popular ones is the double top pattern. This article will delve into the double top chart pattern and how to use it as a forex trading strategy.
What is a Double Top Chart Pattern?
The double top chart pattern is a bearish reversal pattern that appears on price charts. It is a formation that indicates a possible end of an uptrend and a subsequent reversal of price movement to a downtrend. The pattern is characterized by two high peaks that occur at approximately the same level, with a dip in between. The double top pattern is formed when the price of an asset rises to a high, pulls back, rises to a similar high again, then falls below the trough that separates the two highs.
The double top pattern shows that the buyers, who pushed the price up to the first high, failed to push the price higher on the second attempt. It is a sign of weakness in the market, indicating that the sellers may be taking control, and the price is likely to move lower.
The double top pattern is the basis for the double top chart pattern forex trading strategy, which is a price action trading system.
The double top chart pattern is a bearish reversal pattern that shows up in an uptrend.
When it appears, it means that the uptrend could be turning into a downtrend.
Identifying a Double Top Chart Pattern
The double top pattern is easy to identify on a price chart. It is formed by two peaks that are almost at the same level, with a trough in between. The trough that separates the two highs is the critical level in this pattern. It acts as a support level that prevents the price from falling below it. Once the price falls below this level, it confirms the pattern’s validity and signals a bearish reversal.
The double top pattern can occur on any timeframe, but it is more reliable on higher timeframes such as the daily or weekly charts. It is also more reliable when it appears after an extended uptrend.
Currency Pairs To Trade?
With this trading system, you can trade any currency pair.
Timeframes To Trade?
I think you should use time frames of 15 minutes or more.
Any Forex Indicators Required?
You don’t need to use indicators to make things harder. Need not.
Example of Double Top Chart Pattern
A double-top chart pattern looks like this:
- As you can see, the price was going up until the double top pattern appeared on the chart, and then it went down.
- It’s also important to remember that the heights of the top 1 and top 2 should be about the same.
Double Top Chart Pattern Forex Trading Strategy Rules
The double top chart pattern forex trading strategy is easy to understand:
- When you see a bearish reversal candlestick on top, put in a pending sell stop order.
- Put your stop loss 2 to 5 pips above the high of that bearish reversal candlestick pattern.
- You can use previous swing lows as your take-profit levels, or you can figure out your profit target based on a risk-to-reward ratio of 1:3. For example, if your stop loss is 20 pips, your profit target should be set at 60 pips.
- For trades that go as planned, this forex trading system has a very good risk-to-reward ratio.
- When you trade a larger timeframe, like daily, the price moves down by hundreds or even thousands of pips. If you trail-stop your trade, you might be able to catch most of these moves if you don’t get stopped out too quickly.
- Bearish reversal candlesticks will help you get into sell trades at the right time.
- price spikes tend to happen around top 2 zones and if your stop loss is not far away enough, you may get stopped out prematurely.
- beginner forex traders may take a while to know if a double top chart pattern is forming or not.
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