Forex trading is all about identifying patterns and trends in the market. One of the most common and reliable chart patterns is the double top. A double top is a bearish reversal pattern that signals the end of an uptrend and the beginning of a downtrend. It is a chart pattern that occurs when the price of an asset reaches a high point twice and fails to break through that resistance level.
In this article, we will discuss in-depth how to identify a double top pattern in forex and how to trade it.
What is a Double Top Pattern?
A double top pattern is a bearish reversal pattern that occurs when the price of an asset reaches a high point twice and fails to break through that resistance level. The pattern consists of two peaks that are roughly equal in height, with a valley or trough in between. The double top pattern is considered a strong reversal signal because it shows that the buyers have failed to push the price higher, and the sellers are taking control of the market.
How to Identify a Double Top Pattern in Forex?
To identify a double top pattern in forex, you need to look for the following characteristics:
1. Two Peaks: The pattern consists of two peaks that are roughly equal in height. These peaks should be spaced apart by a valley or trough.
2. Resistance Level: The two peaks should be around the same price level, forming a resistance level. This level should be significant, indicating that the buyers have tried to push the price higher twice but failed.
3. Volume: The volume should be higher on the first peak and lower on the second peak. This shows that the buyers are losing interest, and the sellers are gaining control.
4. Timeframe: The pattern can be identified on any timeframe, but it is more reliable on higher timeframes such as the daily or weekly charts.
How to Trade a Double Top Pattern in Forex?
Once you have identified a double top pattern, you can trade it using the following steps:
1. Wait for Confirmation: Before entering a trade, wait for confirmation of the pattern. This can be done by waiting for the price to break below the neckline or support level.
2. Place a Sell Order: Once the pattern is confirmed, place a sell order below the neckline or support level. This will ensure that you enter the trade at the beginning of the downtrend.
3. Set Stop Loss: Set a stop loss above the second peak to limit your losses in case the price moves against your position.
4. Take Profit: Take profit at the target level, which is the distance from the neckline to the highest point of the pattern. This will give you a good risk to reward ratio.
In conclusion, a double top pattern is a reliable bearish reversal pattern that can be used to identify the end of an uptrend and the beginning of a downtrend. To identify the pattern, look for two peaks that are roughly equal in height, a resistance level, lower volume on the second peak, and a timeframe of at least daily or weekly. Once the pattern is confirmed, place a sell order below the neckline or support level, set a stop loss above the second peak, and take profit at the target level. Always remember to manage your risk by using stop losses and proper position sizing.