There are some trading patterns in the market that are widely used by traders all over the world and double top trading is one of them. This is the easiest and clearest way to identify potential sell trades in a trade. Most novices still have a blind spot for it. Let's talk about the double top trading mode in detail below.
// identify the double top pattern
A double top is a bearish reversal pattern that usually forms at the end of a bullish trend. Two consecutive rounded tops at about the same height complete the pattern. The first round top generally forms in an obvious resistance area.
①First high ②Second high ③Neckline
What is currently happening is that buyers are trying to push the price above the resistance level at ①, but are unable to do so because sellers have entered the market. The buyers made a second attempt, but the buyers were unable to break through the new high shown at ② as the sellers again entered the market massively and overwhelmed the buyers. When it became clear that buyers were unable to push the price above the resistance level, the price reversed to a downtrend as more sellers entered the market.
Note: Price must break the neckline of the pattern for it to be a valid double top pattern. Once you identify the pattern on the price chart, you can look for potential selling opportunities.
// The psychology behind the double top pattern
A double top pattern occurs at a major resistance area. This pattern suggests that when price action reaches an obvious resistance zone, buyers are afraid to buy because of the resistance. On the other hand, sellers will choose to sell in the same resistance area.
After breaking out of the first high, the price action falls back to an important support area (the neckline), at which point the buyer trading psychology tends to strengthen buying to reach new higher prices. But when price action reaches the resistance area again, buyers fail to break new highs, sellers gain control, and price action begins to move in the opposite direction, forming a double top pattern.
// Double top pattern – trading strategy
There are two ways to trade the "Double Top" chart pattern. To make sure the strategies we share are the ones that work, we backtest them again and again.
1. Double top pattern + bearish pattern
Traders in the market widely use a variety of bearish patterns, the most commonly used bearish patterns include engulfing pattern, evening doji, shooting star, three crows, etc.
This strategy is to identify the bearish formation of the second peak. If you find any of these, you can go short. Make sure to place your stop loss above the resistance line.
recognition pattern
In the EUR/JPY chart below, the formation of a double top pattern can be clearly seen.
As shown in the chart below, the price action showed a bearish engulfing candle pattern immediately after the second top. This shows that the sellers have fully absorbed the buyers and it is time to go short.
Stop loss and take profit placement
Entering the market at the close of a bearish engulfing candle with a stop above the resistance line is the most logical way to maximize profits, once this is spotted, the price action has little chance of going up.
As mentioned earlier, the first take profit is at the neckline of the double top and the second is at the double of the entire pattern. It should be noted here that please determine the position of the target price according to your trading style, and you can also close the position anytime and anywhere.
2. Double top pattern + RSI
In this strategy, pair the Double Top pattern with the RSI indicator to identify accurate shorting signals. RSI stands for Relative Strength Index and it is a momentum indicator developed by J. Welles Wilder Jr. in 1978. When the indicator reaches the 70 level, it indicates that the market is overbought and when the indicator reaches the 30 level, the market is oversold.
The strategy is simple, when the price action hits the second peak and starts to oscillate, look to see if the RSI is in an overbought market condition. If yes, it can be considered a potential sell signal.
recognition pattern
We have identified a double top chart pattern in the GBP/CHF currency pair below.
In the image below, we can see that the first and second peaks of the pattern are very strong. When the price action approaches the second peak, the price immediately falls and the RSI is in the overbought area, so it is safe to short.
Stop Loss and Take Profit
When the conditions are met, you can go short, set the stop loss above the entry , and take profit in the support area of the higher time frame. Overall, this is a trade above 100 pips, and if there is not enough room in the support area, it can be closed when the RSI reaches the oversold area.
in conclusion
Trading up and down patterns is an easy way to make money. Some models have greater hidden risks, but the double top does not. It offers some of the best risk reward entries, and this pattern works on all trading time frames. Finally, I would like to remind all traders to make sure that they truly understand the logic behind the model before trading , so as to avoid unnecessary losses. Good luck with the transaction!
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