Forex trading is a complex process that requires traders to have a good understanding of market trends and patterns. One of the most popular chart patterns used in Forex trading is the top hat pattern. This pattern is a reversal pattern that indicates a possible change in the market trend. In this article, we will discuss what the top hat pattern is, how to spot it, and how to use it in Forex trading.
What is a top hat forex chart pattern?
The top hat pattern is a type of reversal pattern that signals a possible change in the market trend. It is called a top hat pattern because it looks like a top hat with a brim and a crown. The pattern is formed when the market is in an uptrend, and a long bullish candle is followed by a doji or spinning top candle. The doji or spinning top candle indicates indecision in the market, and it can be a sign that the bullish trend is losing momentum.
How to spot a top hat forex chart pattern?
To spot a top hat pattern, you need to look for the following:
1. The market is in an uptrend
2. A long bullish candle appears
3. A doji or spinning top candle appears after the bullish candle
4. The doji or spinning top candle has a small body and long upper and lower wicks
The appearance of the top hat pattern indicates that the bulls are losing control, and the bears may be taking over. It is important to note that the pattern is not valid until the next candle confirms the reversal.
How to use a top hat forex chart pattern in trading?
The top hat pattern can be used to enter or exit trades. Here are some ways to use the pattern in trading:
1. Entry point: If you spot a top hat pattern, you can enter a short trade when the next candle confirms the reversal. You can place a stop loss above the high of the top hat pattern and take profit at the support level.
2. Exit point: If you are in a long trade and you spot a top hat pattern, it may be a sign that the trend is about to reverse. You can exit the trade to avoid potential losses.
3. Confirmation: The top hat pattern can also be used to confirm other indicators or patterns. For example, if you see a top hat pattern and a bearish divergence in the RSI, it may be a stronger signal to enter a short trade.
In conclusion, the top hat pattern is a popular reversal pattern that can be used in Forex trading. It is formed when a long bullish candle is followed by a doji or spinning top candle. The pattern indicates that the bulls are losing control, and the bears may be taking over. Traders can use the pattern to enter or exit trades, or to confirm other indicators or patterns. However, it is important to remember that no pattern is 100% accurate, and traders should always use risk management strategies to minimize potential losses.
