The double top pattern is one of the most common price action patterns in the forex market. When a double top starts to form, it can be decisive on the next movement of the market, as the double tops are known as reversal chart patterns. A double top pattern can be considered valid if two tops that are known as resistance zones are created on the double top pattern.
A double pattern besides the tops has the neckline too and the neckline can act as a support zone. The tops on the double top chart pattern are one of the key elements that you as a trader should look for. The double top is similar to a double bottom pattern, triple top, but the double top pattern is a reversal pattern with support (bottoms).
In this article we will share some examples in the article below, so you can understand how to identify potential double tops. And when you spot double tops, I will explain how to trade them.
Double Top pattern example
We have a double top pattern example shown below. And as you can see there are tops that are known resistance zones the neckline. The tops are created when there’s a momentum of sellers in the forex market. The first resistance level was formed, and then it created the neckline near the 1590 level.
Because the sellers weren’t able to push the price further down, a support zone was created that’s known as the neckline. Price jumped from the support zone to test the first top (resistance). And the price managed to break the resistance, but then it went down because a fake breakout was created.
Since the resistance is valid still, the momentum of the sellers pushed the price down again. And another second resistance or the second top was created. Now we have two tops (two resistances levels) that confirm that a double top is valid.
Since we have the confirmation that the double top chart pattern is valid, we will explain below how you could trade a similar situation in forex trading.
How to trade Double Top pattern
Now, before we continue explaining how you can trade similar examples on the financial markets, during your trading it can be a different situation. In this example, we had a fake price break with a breakout, but in your situation, there could be a fakeout too and the price can continue to go up still. So you should do your technical analysis properly in order to have success with trades, and also use a stop loss.
Now, let’s show an example of how you can trade the double top pattern.
Since the first resistance or the first top was created, a neckline was created at the 1590 level. The price has moved up and tested us with a fake breakout. But the sellers have managed to take the momentum and push the price down. As you can on the image, we have marked a bearish (red) candlestick after the bullish (green) candlestick was created.
The bearish candle has given us an indication that the price can continue to fall because of the engulfing candlestick. An engulfing candlestick on this situation has shown that the momentum of the sellers is very powerful.
The sell order should have been placed near the 1670 level, as that would give you the best price to enter. The reason why we should have entered at that price level is because of a small retract momentum.
As you can see that, after the bearish engulfing candle was closed at 1670, the price has moved up near the 1690 level. But the price then started to go down, and the bearish candle that’s marked with the yellow arrow, at the 1670 level, would be the best price to enter.
The stop loss in this situation is different because the example is shown on the 4-hour timeframe. So the stop loss should have been at least 100 pips because of the longer timeframe. But switching to a shorter timeframe such as 1-hour could give you a better look to place the stop loss and to risk a less more.
The take profit should be placed at the neckline since the neckline is the support zone. And that zone could be a major zone if the price will continue to go up or down. So instead of risking to wait if the support will break or not, we can just set the take profit at that level and collect your profit so we can not risk our profit.
The examples we give on our blog are based on our technical analysis. But you as a trader should always trade according to your technical analysis and fundamental analysis.