There are two major ways traders analyze the markets and predict the future: Technical and fundamental analysis. Chart patterns are an essential part of technical analysis. Double Top is one of the most widely used patterns in Forex. Let’s find out what the pattern is exactly and how to use it.
Double Top definition
Double Top is a chart pattern that forms at the top of an uptrend and reverses it. And therefore, the pattern is known as a reversal one. Double Top is a bearish chart pattern as it drives the price lower. Double Tops give traders an opportunity to spot trend reversals at an early stage and traders get great risk to reward ratios as a result.
Why is Double Top important for traders?
- Double Top chart patterns can help traders stop reversal early and get great risk to reward ratios.
- Understanding Double Tops can help traders manage their positions better. For instance, if a trader is long and sees a double top forming, getting out of the position might be a good idea.
- This is one of the most common patterns that are easy to spot and relatively accurate.
Thorough Double Top Explanation
As we mentioned before, Double Top is a bearish chart pattern that notifies us about an upcoming trend reversal and that the bearish run is up ahead. It consists of two highs followed by two lows. Double Tops usually form after a strong uptrend. After the first peak and drop the second peak fails to break the previous top, prices start to fall and the bears take the initiative. The pattern is considered ready to be entered short once the necklace is broken. Many traders make the mistake of placing the orders too early. They finish the patterns in their heads and soon may find themselves trading broken patterns. Keep in mind that the patterns only produce great trading opportunities when they are complete.
Double Top can be used in accordance with other tools such as: indicators and market news. The combination increases the chances of success. However, integrating too many methods in your analysis can result in analysis paralysis. Analysis paralysis is a common phenomenon in Forex and it occurs when traders have many variables and they contradict with each other. Very similar patterns to the Double Top can also form at the bottom of a downtrend. Double Bottom is an opposite of the Double Top pattern.
Example of Double Top in Forex
In the following example of EUR/USD, you can see a strong uptrend. The price hits the first top at 1.01984. The top is followed by a pullback and another top. Notice that the second top fails to break the previous top’s highest price and reverses downwards. Entry point appears once the necklace is broken, in this case 1.01669. Keep in mind that unless you wait for the entry signal, the price might reverse and the pattern may never get finished. Patterns are there to give us an edge and to utilize that edge, we need to trade them properly. Stop loss orders can be placed outside the highest top. However, some traders might place more conservative stops right above the necklace line.
FAQs on Double Top in Forex
What’s the Double Top definition?
Double Top is a reversal chart pattern, actively used in financial markets as a tool for conducting technical analysis. Double Top forms at the top of an uptrend and reverses it. The pattern gives traders the opportunity to spot reversals early and get goor risk to reward ratios.
How accurate is the Double Top pattern?
This is one of the most commonly used patterns, which means that it is relatively accurate compared to some other patterns. There have been many studies around this pattern, and it’s said that it has a 76% accuracy rate. However, each currency pair is unique and it’s best to test and backtest your strategies before risking your hard-earned money.