Double top is one of the most common chart patterns that traders use to identify potential trend reversals in the forex market. It occurs when the price of an asset reaches a certain level twice, but fails to break through it, indicating that the buyers are losing momentum and the sellers are gaining control. In this article, we will explain what double top means in forex, how to identify it, and how to trade it.
What is a double top?
A double top is a technical chart pattern that forms when the price of an asset reaches a certain level twice, but fails to break through it, resulting in a reversal of the previous uptrend. The pattern is identified by two peaks that are roughly equal in height, with a trough in between them, forming the shape of the letter “M.” The price usually retraces back to the level of the trough or slightly below it, indicating that the sellers have taken control of the market.
How to identify a double top?
To identify a double top pattern, traders need to look for two peaks that are roughly equal in height, with a trough in between them. The peaks should ideally be spaced out by a few weeks or months, indicating that the price has attempted to break through the resistance level twice. Traders can also use technical indicators such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) to confirm the pattern.
How to trade a double top pattern?
Traders can use the double top pattern to enter a short position or to exit a long position, depending on their trading strategy. Here are some ways to trade a double top pattern:
1. Sell at the second peak: Traders can wait for the price to reach the second peak and sell at the resistance level, with a stop loss above the peak. This strategy works well if the price has already shown signs of weakness, such as a bearish divergence in the RSI or a MACD crossover.
2. Sell at the break of the trough: Traders can wait for the price to break below the trough and sell at the support level, with a stop loss above the second peak. This strategy works well if the price has already broken below a key support level, indicating a strong bearish trend.
3. Sell on a pullback: Traders can wait for the price to pull back to the resistance level and sell at the second peak, with a stop loss above the peak. This strategy works well if the price has not yet shown signs of weakness, but the trader expects a reversal based on other factors such as fundamental analysis or market sentiment.
4. Use a trailing stop: Traders can use a trailing stop to capture profits as the price moves lower, while still allowing for some upside potential if the price rebounds. This strategy works well if the trader is unsure about the strength of the reversal and wants to limit their risk.
Conclusion
Double top is a common chart pattern that traders use to identify potential trend reversals in the forex market. It occurs when the price reaches a certain level twice, but fails to break through it, indicating that the buyers are losing momentum and the sellers are gaining control. Traders can use the double top pattern to enter a short position or to exit a long position, depending on their trading strategy. As with any trading strategy, it is important to use proper risk management techniques and to always have a plan in place before entering a trade.
