The concept of what is a double top pattern in forex trading is of interest to many investors. This pattern has the role of giving signals of a trend reversal. Besides the double top model, investors may also have heard of the double bottom model and the triple top model. These are all important price models used by many investors. These models are highly reliable, helping investors come up with smart trading strategies. Let’s join Forex Trading to learn details about this price model right away.
Learn in detail about the concept what is a double top pattern.
The double-top model also has another name: the double-top price model. This is an M-shaped price pattern on the Forex chart.
Simple understanding of the double-top model
The double-top pattern is a price reversal pattern that often appears at the end of an uptrend and signals a reversal from an uptrend to a downtrend. This pattern has 2 peaks of the same height and a bottom formed by 2 peaks in the neck. The shape of the double top pattern resembles the letter M. This pattern shows investors that buyers will initially try to push the price up according to the main trend.
But soon, sellers entered the market causing the price to fall, forming the first peak. Then, buyers increased the price again, but the resistance level was so strong that it could not be broken, forming another peak. If the price breaks through the cleavage line, it will fall sharply. Currently, investors can place a short position to predict the new trend.
What are the identifying characteristics of the 2-peak model?
To identify this model, investors first need to pay attention to the trend. Before this pattern appears, the trend must be an uptrend. Next is the shape, the double top pattern has a shape similar to the letter M.
Inside it includes two peaks of equal height. There is a bottom below the center and it will form between the two peaks and a Neckline. The time to form this model is usually from 3 to 4 weeks. When prices break out of the pattern they will drop sharply or reset and then decline. The double-top pattern is similar to the inverted head and shoulders pattern. They all signal that the market will decrease in price.
See more: Analyze & forecast trend effective candlestick pattern
How does the double-top pattern form?
Besides understanding the concept what is a double top pattern, investors need to understand the formation of this model. So that you can apply them to investing. This pattern shows that buyers are initially still trying to push the price towards the main trend. But soon, sellers quickly joined the market, causing prices to drop sharply.
The pattern formed the first top. After that, buyers continued to push the price higher but failed to break the strong resistance level leading to the second peak. Some new investors often make the mistake of only seeing two peaks in the pattern. This leads to misunderstandings about the situation and causes in the market. The double top pattern is only truly complete when the price returns to retest the neckline.
Distinguish between 2 tops and 2 bottoms and 2 tops and 3 bottoms
What are the detailed concepts of 2 tops, 2 tops 2 bottoms, 2 tops 3 bottoms models? What is the difference between these models? Let’s find out now. The 2 top 2 bottom pattern is formed from a downtrend, with 2 bottoms and 1 Neckline. With the 2 top 2 bottom models, when it reaches the first bottom, the price tends to reverse. An intermediate peak is formed in this reversal zone. However, the price did not continue to rise but returned to the previous low and broke out of the neckline. They form a second base, which is approximately the same height as the first base.
Before the third bottom forms, the 3-bottom model has the same shape as the 2-bottom model. With the first bottom, the price is rising in a prolonged downtrend and will be formed. With the second bottom, the supply in the market is still increasing and the price turns down, the second bottom is established. Similarly, until the third bottom appears, it is nearly equal to the previous two bottoms.
Once the third bottom is created, the triple bottom pattern is only completed when the price breaks the resistance area or Neckline. At this point, the resistance line is broken and they can become a potential support line. Sometimes the price will turn around and retest this new support level just like the first correction.
Ways to trade effectively with what is a double top pattern?
To trade with the double-top model, investors need to choose a strategy and combine it with other models to increase reliability. Investors can combine the model with a trendline, a rising flag pattern,… to add more data to the chart. Let’s take a look and see what trading methods there are with the double-top model.
Method 1 – Enter the order as soon as the 2nd peak forms
With this trading method, investors need to combine it with the trendline. Trendline is a straight line passing through the center bottom along with the bottoms of the previous correction declines.
First, find the entry point at the falling price of the second peak. Investors should note that at this time the price needs to touch the trendline. Set your stop loss starting from the 2nd peak and a few pips away. The profit-taking point according to the R: R ratio is 1:1 or 1:2 depending on the investor’s needs.
Method 2 – Enter an order when the trading price breaks out of the Neckline
With this method, the investor will place a sell order immediately after the double top pattern is completed and the price breaks out of the neckline. Investors can place orders at the closing price of the candle that breaks the neckline. Set the stop loss a few pips away from the 2nd peak. Finally, the investor takes profit at a point exactly equal to the height of the model from the entry point.
See more: Optimize trading with IC Markets Exchange
Method 3 – Trade when the price returns to retest the Neckline
This trading method will be safer than the previous two methods. However, investors may also miss a good entry point if the price does not turn around and instead breaks up. For the entry point, enter the order right at the return price at the neckline. Traders can set stop loss and take profit points in the same way as the second method. Stop loss a few pips away from the second peak and take profit equal to the model height from the entry point.
Conclude
Currently, the double top model is considered a quite important and useful tool for technical analysis investors. Above is some basic information about the concept of what is a double top pattern, its characteristics, and methods of applying the model that Forex Trading sends to readers. To be able to trade well with this model, investors should study and experience more and refer to our forex knowledge articles!
FAQs
With the 2 peaks and 3 bottoms model, if the 3rd bottom is higher, what does it prove?
With the 2 top 3 bottom models, if the 3rd bottom is higher than the 2nd bottom, it proves that the market is in an uptrend.
When using the double-top model, what should investors pay attention to?
With the 2-peak model, if a good signal has passed, you should not enter an order. Investors trading with this model do not have to continuously store orders.
Is it necessary to pay attention to volume when trading between two peaks?
Paying attention to the two peaks of the model is essential. If you see low volume at the 2 peaks, you should not rush into an order, just monitor further.
