Double Top Pattern in Forex

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The double top pattern in forex belongs to the category of chart patterns in technical analysis. If a financial instrument’s price shows a double top or bottom, it can indicate a possible reversal in the price trend or just a lack of progress in the current direction.

Double bottoms indicate an end to the bearish trend, whereas double tops indicate the bullish trend. A trader’s technical analysis strategy can benefit from double tops and bottoms. However, chart patterns aren’t always accurate in predicting trend reversals.

Trades can use various tools and technical indicators to aid their decision-making.

This article will explain the double top pattern in trading, spot it in price charts, and trade it.

Double top pattern: What is it?

Candlestick patterns form a double top when a price makes a high, pulls back, creates a swing low, and moves back to near the previous high. If the price drops below the swing low formed between the two peaks, this pattern indicates a bearish reversal.

There are many uses for candlestick charts since they display both highs and lows for each price bar. In addition, double top patterns remain valid until broken, which does not necessarily indicate a trend reversal.

There is a huge possibility that the price may rise above the highs. As can be seen below, a double top can be seen on a Brent Crude oil price chart.

double-top

Example of a double top on a Brent Crude oil price chart

A double top indicates what?

Because there are two major pieces of bearish evidence for the double top pattern, it indicates a bearish reversal. First, according to the above chart, the second attempt price cannot move above the first high since resistance is present at the highs.

A new swing low is created when the price falls below the previous swing low.

Instead of indicating an uptrend, these signals indicate a downtrend. A double top pattern requires lower swing lows when a downtrend is present.

A double top signals an uptrend’s end, a bearish reversal pattern. As well as a neckline acting as local support, it forms two price highs at the same level. Short positions are opened after the price breaks below the neckline.

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How do you determine if a top has double tops?

It would help if you found out the Resistance level to detect double touch or double top. A double price top occurs when the price bounces back from the Resistance Level a second time. The strong resistance level prevents the price from breaking through.

Finding a valid double top is as simple as following the steps below.

  1. There must be a bullish trend before forming a double top or M pattern on a candlestick chart.
  2. At the high point of a double top, mark a resistance zone
  3. To get to the low of the double top, mirror that Resistance zone.

What is the neckline in the double top?

Charts always show price movements in the form of swing waves. We have drawn the resistance zone on the swing wave’s highs that formed a double top. On the swing wave’s low, we have drawn the support zone. The support zone and neckline are referred to as the support zone in the double top pattern.

A valid neckline breakout is necessary for a double top pattern to be completed as long as the trend remains bullish and a valid neckline or support zone breakout, the price can break through the resistance zone.

When the support zone breaks, the buyers have lost momentum, and the sellers are on hold.

The 3 formations of a double top

Let’s talk about the three significant formations of a Double Top:

  1. Double Tops with the Same Swing High.
  2. Double Tops with a Higher High.
  3. Double Tops with a Lower High.

Double tops with the same swing high

People tend to look for double tops with the same swing highs because they’re easily recognised on the charts.

double-top-2

The chart on Double Tops with the Same Swing High

The Double Top is evident in the chart above, with the two tops around the same level.

It is possible to have Double Tops with higher tops and Double Tops with lower tops. And that somehow leads us to the following two significant formations.

Double tops with a higher high

There is no such thing as the Double Top with a Higher High. The second top must not be much higher than the first top to be considered a Double Top with a Higher High.

As long as it’s significantly higher, the market would be making higher highs typically rather than a Double Top.

We can also consider the second top in the chart above as a Double Top because it is higher than the first, but not by a significant amount.

The second top in the chart below is much higher than the first. A Double Top is more likely to form a normal trend wave as it forms Higher Highs rather than a double top.

double-top-3

The chart on Double Tops with a Higher High

Don’t blame me if you get stopped out immediately because you were mistaken about it being a Double Top!

Thus, as a general rule, you should not be short if the market makes higher highs like the one in the above chart.

It indicates strong uptrend momentum when such a move occurs.

Double tops with a lower high

There are times when the market does not form a Higher High in an uptrend. This is known as a Lower High.

This can indicate a loss of momentum and a shift sideways or even a trend reversal. Thus, this is still a Double Top with a Lower High, even though it’s not much lower. Similarly, we don’t want one of the tops of the Double Top to be too far from the first top.

In some cases, going short may be viable, but this is not a Double Top for our purposes.

Limitations

Double top patterns must be correctly identified to stay helpful for the traders. Traders who fail to detect them will be unable to profit from them. When a trader can identify a double top pattern on time, it can be highly effective for making market decisions.

When dealing with technical analysis in forex trading, it is vital to play it safe and not jump to conclusions too soon.

The Double top: how to use it?

The market might form a double top pattern when it reaches the overbought level; local support is found when the price retreats from the first high. However, the pattern isn’t visible at this point.

In response to the first top, the price has pulled back to the neckline (support) and has bounced back to test the newly formed resistance. It will form a second high if it can’t break above it. When it breaks below the neckline, traders should be on alert for the trend and prepare to short.

The same strategies can be used for double bottoms but with inverted rules.

Do double bottom and double top work for crypto trading?

Yes, without a doubt! All markets, including cryptocurrency, work well with these two patterns. However, these patterns may appear less frequently than in the forex market, for instance! Nevertheless, they are just as valuable when you see them on a chart.

In the cryptocurrency trading community, technical analysis plays a significant role, and chart patterns often provide the most powerful signals, primarily when used together with technical indicators. Therefore, although cryptocurrencies are more volatile and unpredictable, cryptocurrency traders should be cautious.

These two patterns can be used on various timeframes, such as M15, H1, H4, or D1. Swing traders can use them, day traders, and position traders. A universal pattern also works well on stocks, forex pairs, commodities, and cryptocurrencies.

They offer their metrics but come with their drawbacks as well. For example, one of the main disadvantages of the double top and bottom is that neither can consolidate the newly formed trend.

If the price dips below the support for the third time, the bears might attempt to break below it for the fourth time. Trading strategies like stop losses can therefore be used!

Differences between double tops and double bottoms

In terms of their fundamental nature, the Double Top and the Double Bottom have little in common other than that they are at opposing ends of the spectrum. The Double Bottom is suitable for bulls, while the Double Top is suitable for bears since the latter signifies a bearish reversal trend.

There are two major high points on either side of the neckline positioned at almost the same level. The neckline represents local support at this time.

As the crypto market is striving to expand, the approach for trading cryptocurrencies on large timeframes may differ, as the double bottoms may appear more often since the market is trying to expand.

Trading with a double top pattern: mistakes to avoid

Trading the double top can lead to one of the most common mistakes: going long immediately when the price breaks above the pattern’s neckline. It’s possible, however, to trade against a larger trend if you’re not cautious.

It is more likely that the market will ignore the small Double top pattern if it is in the middle of the strong bearish trend.

You can avoid this by adding Moving Average (MA) with period 20. Buying the neckline breakout is not recommended if the price is below the MA. If you are trading the double top, make sure the price does not exceed 20 MA.

Overall, if you follow the mentioned rules, even beginners will easily follow these patterns. However, to avoid trading with real money, make sure you practice them on a demo account first.

Involvement of risk management in double top pattern

Although double tops are highly reliable, they cannot always guarantee trend reversals. There are various basic techniques that you can use to mitigate risk so that you do not experience significant losses that might affect your entire account.

One of the major steps to reducing loss risks is to place a stop-loss order. Stop-loss should be set at the intersection of the breakout (neckline) and resistance (for a Double Top) or support (for a Double Bottom).

It is yet recommended that you do not use more than 1% of your balance per trade to promote consistency. A great rule of thumb is to never use more than 1% of your balance at a time.

The market may be volatile, and you may be tempted to go all in to hit the jackpot. Unfortunately, although you might be lucky for once, such a practice is not guaranteed to work long-term.

Related questions-FAQs

A double top tells you what?

Traders use double tops and bottoms to analyse market trends. The shape of a double top resembles an M, indicating a bearish trend reversal. Conversely, ‘W’ shaped double bottoms signal a bullish price movement.

What is the accuracy of the double top pattern?

Double tops are defined as two nearly equal highs, separated by some space, whereas double bottoms are defined as two nearly equal lows. Double bottoms are slightly more successful breakout patterns than double tops; as 78.55 percent of the time, they reach their targets compared to 75.01% of the time.

How long does it take for a double top to form?

It remains to be confirmed whether the pattern exists. There is usually a period between peaks of 1-3 months, but this can vary. Although the exact peak dates are ideal, some wiggle room is allowed. Most of the time, a peak that is 3% higher than the previous high is adequate!

What is the ideal time to trade a double top?

Traders can use double tops and double bottoms to identify a trend reversal. However, the reversal cannot be confirmed until two peaks or two lows are formed.

Bottom line

Traders who can identify and manipulate the double top pattern information in time can profit from one of the most commonly occurring patterns in forex charts.

A health plan or strategy must tread the market and trade it successfully using these patterns. Practice a demo account or search for the formations on historical charts to improve your trading skills. Always pay attention to technical indicators, including the indicator of overbought and oversold levels.

You can identify this pattern by using charts and indicators at the right time and utilising it to your advantage to further your trading experience.

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