The use of Forex double top is widespread among traders in the Forex market. Forex double top pattern looks like the formation of two maxima at a critical resistance level. A double top in Forex implies that the market would likely stop at this level the third time if it has already deviated from it twice. However, some other important aspects must be considered for a template to be handy.
Double top: What is it?
The double top in Forex is a popular technical pattern among traders, and the formation of two maxima at the critical resistance level indicates its strength. However, there are a few essential things to remember for this template to be helpful.
The chart shows how the market made an extended move higher but was quickly rejected by resistance (the first top). The market then returned to support and retested the resistance level (second top) but was rejected again.
The mistake is to sell immediately after the formation of the second top because the confirmation of the double top pattern comes only when the market closes below the support level (neckline).
If the market trades below the neckline, this confirms the pattern and signals the first breakout. The double top pattern forms an “M” shape, where the line passing through the tops is the resistance line. The pattern is considered a bearish reversal pattern and appears in an uptrend. To confirm the pattern, the price needs to break the retracement low between the two highs, and the neckline turns into a support level, which then becomes a resistance level.
Double top in Forex trading
Using the double top pattern Forex strategy begins with the fact that you need to define a pattern. If the price breaks through the neckline and continues to move down, it can confirm a double-top pattern. Other technical indicators can also be used to confirm the pattern, such as moving averages or oscillators.
Once the pattern is confirmed, a sell entry point can be set when the price crosses the low between the two tops. Don't forget to set your stop loss and profit points as well. 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. When the price reaches the set points, the transaction is completed.
Identifying a Double Top on Forex Charts
The key question: how to see a double top in Forex? The double-top pattern consists of several elements:
- A reversal pattern requires a solid trend. In the case of a double top, the trend should be up for several months.
- The first peak. It is the highest point of the trend, and this is not a sign of a trend change.
- Valley. It is the low between the two peaks, usually with a 10-20% drop in price. The price level of this valley is called a neckline. The volume on the decline from the first peak is usually small.
- The second peak appears with low volume and slightly below the first peak, indicating resistance and exhaustion. At this point, the template still needs validation.
- A further drop in price after the second peak should be accompanied by an increase in volume, indicating sellers' dominance in the market.
The pattern ends when the support level is broken at the lowest point between the two highs, and this should happen with a high volume or an accelerated descent. Knowing this, you can apply successful trading strategies for maximum profit.
Pros & cons of double top pattern Forex strategy
To successfully use this technical indicator in a trading strategy, it is important to understand when it works and when it does not.
- A solid sign of a trend reversal, which can be effective in signaling the beginning of a bear market;
- Possibilities of determining entry, stop-loss, and take-profit levels;
- The indicator can be used as a separate tool or in combination with other technical indicators.
- Incorrect interpretation of the pattern can cause significant damage;
- Double-top formations are prone to false breakouts and spikes, where traders may enter the market too early.
Forex double top trading tips
The pattern is clearly visible in the examples, but when you face the graphs in person, things can seem more complicated. To learn how to work with trading signals correctly, you should be guided by the advice of experts. Regarding working with the double-top pattern forex strategy, some tips below can work in your favor.
Use moving average
When trading with a double top, moving averages can be a helpful tool to determine the optimal time to trade. There are two types of moving average patterns for this strategy. The first type is to sell near the moving average when it declines, and the second type involves selling on a second breakout when the price drops below the moving average. Using moving averages can confirm the double-top pattern and increase the chances of a successful trade.
Enter a position before the price drops below the minimum
Often, traders try to sell an asset when the price breaks below the low. However, a smarter strategy is to enter the position before the price drops below the low. This can be done because only some traders will buy the asset when the price falls near the support level. You can get a bigger profit if you enter a position just before the break below the minimum.
Look for strong trends
If there is a solid upward trend in the market, it does not mean that it will continue indefinitely. When the trend reaches its peak, it can twist sharply, as many traders close their positions. Instead of fearing a strong uptrend, it's better to consider it a selling opportunity. If it is difficult for you to do it yourself, entrust the delivery to one of the best Forex robots.
Use a support level
To maximize profits, you can use a support level. When prices reach support, they can stop falling and start rising again. One way to capitalize on this is to sell assets after a support level is reached and take a profit.
Calculate the reversal percentage
When the trend is already ending to find support, it is helpful to calculate the reversal percentage. Values such as 33%, 50%, and 67% are commonly used. For example, if the market is up 100 pips from 133.00 to 134.00, support can be found at 133.67, 133.50, and 133.33. Also, using Fibonacci levels will help set targets more accurately.
Set small stops
Setting small stops during trading is recommended as it is pretty tricky to predict the end of the upswing in the market. The small size of the stop allows you to limit losses, reducing the risk of capital losses. With losses minimized, you can focus on finding the next profit opportunity.
Use a trailing stop to set the goal
A trailing stop allows you to set a large target and helps prevent unrealized profits from turning into losses. When trading a double-top pattern, it can be challenging to determine the right target because you don't know how far the market will go down. Therefore, some traders use trailing stops to close positions instead of setting targets.
The Bottom Line
Using the knowledge of what does a double top mean in Forex is not a guarantee of success. To be sure of the correctness of the signal, it is necessary to ensure that all the required conditions for the formation of a double top are met. It is also essential to confirm the chart pattern with other aspects of technical analysis. The more confirming factors there are, the more reliable the trading signal will be.