Naked Trading Double Top Chart Pattern Strategy

What they think is a reversal pattern could just be consolidation. Besides, I don’t know too many traders who will complain about booking 270 pips of profit. So to summarize, a measured move specifies the distance of something while the objective defines the exact level or target. The distance from the broken level of the pattern to a future point in the market.

To identify a double top pattern, look for a letter “M” shaped formation on a chart with two roughly equal peaks that occur after one another. The pattern is confirmed once the price falls below a support level equivalent to the low between the two previous peaks. Double tops are part of the classical chart patterns group and are certainly known among the most reliable and commonly used chart patterns in technical analysis. This is because the double top pattern shows a perfect visualization that buyers can’t push prices higher, and the trend is about to reverse. When such a breakout is sustained, it usually results in a sharp market decline to meet the pattern’s measured move objective.

Double tops and bottoms are important technical analysis patterns used by traders. At first glance four standard deviations may seem like an extreme choice. After all, two standard deviations cover 95% of possible scenarios in a normal distribution of a dataset. Classic statistical assumptions are not very useful for traders.

Now it’s time for the really fun part – finding out how to profit consistently from these setups. For this reason, I tend not to separate the two, but I do like to see a well-defined M or W from the patterns I trade. At DailyFX we researched over 100,000 live IG Group accounts to find out the secrets of successful traders and published the findings in our Traits of Successful Tradersguide.

How to Trade Double Tops and Double Bottoms

The double top pattern can produce a major reversal so we advise you to be very flexible with your profit target not to miss any big profit opportunity. The next logical thing we need to establish for the Double top chart pattern strategy is where to take profits. The probability of two tops happening at the same exact price level is almost impossible. You’ll often find that the two tops have slight variations, but they happen near the same price zone. What is more important is the closing price, which can align perfectly if the location of the double top pattern is good.

IC Markets are my top choice as I find they have tight spreads, low commission fees, quick execution speeds and excellent customer support. Some traders may wish to use the pattern in conjunction with the momentum oscillator so that they can find overbought/oversold conditions and divergences. When the value-line for the RSI is over 70, it means that the price is in an “overbought” zone, which suggests a likely end to the uptrend. When the value line of the RSI is below 30, on the other hand, it means that the price is in an “oversold” zone, which means that it could go even lower. Double Bottom formation is in many ways the mirror image of theDouble Top.

Double Top and Double Bottom Summary

Trading coaches Meet the market trading coach team that will be providing you with the best trading knowledge. Trading academy Learn more about the leading Academy to career trader Program. Don’t forget to check out our previous guide on Symmetrical Triangles which is a great continuation pattern to exploit if you miss the top or the bottom of any market. However, core inflation, which avoids the most volatile food and energy prices, rose to a record high of 5.7%. This means that the ECB will need to continue hiking interest rates in the coming months.

Leaving the trade early may seem prudent and logical, but markets are rarely that straightforward. The net effect is a series of frustrating stops out of positions that often would have turned out to be successful trades. One great criticism of technical pattern trading is that setups always look obvious in hindsight but that executing in real time is actually very difficult. Although these patterns appear almost daily, successfully identifying and trading the patterns is no easy task. The resistance zone is drawn on the highs of the swing wave that formed a double top. The support zone is also known as the neckline in the double top pattern.

Depending on the Kicker and will decide my SL level but TP not… This hawkishness is mostly because of the need to lower inflation. Data published last week showed that inflation in the region was mixed in March. Headline inflation dropped sharply as natural gas prices plummeted to the lowest level since 2021. The EUR/USD exchange rate pulled back on Monday morning, continuing the sell-off that started on Friday.

Double Top pattern sell strategy

It is the most widely used double top pattern forex strategy pattern in technical analysis. Retail traders use this price pattern to forecast a change of trend from bullish into a bearish trend. As the double top is formed at the end of an uptrend, the prior trend should be an uptrend.

The double top pattern is incomplete until a valid neckline breakout happens. Because the trend will remain bullish and the price has the ability to break the resistance zone until a valid neckline or support zone breakout. When the support zone breaks, then it means buyers have lost the momentum and sellers are on hold now.

It dropped to a low of 1.0850, the lowest level since Thursday, and ~0.80% below the highest point in March. The level at which the market is likely to find an increase of buy or sell orders. Let’s revisit our EURUSD pattern to see if we can identify a favorable point of entry. The first thing you need to know is that the initial breakout is not what triggers the trade setup.

The Double Top is a standard pattern with two highs and one low to form a reversal pattern. The central part of the pattern is the dropping of the price between two highs. 👉 If you want to receive an invitation to our live webinars, trading ideas, trading strategy, and high-quality forex articles, signup for ourNewsletter.

Forex Trading for Beginners: 3 Profitable Strategies for 2023

Nowadays, to trade a chart pattern successfully, you need to make a strategy with the addition of filters. The Stop-loss level is always above the highest high of the double top pattern. After identification of a double top pattern, the next step is to make a good trading plan. As mentioned earlier, the pattern takes place after the formation of two tops and two bottoms.

To learn more about a reversal pattern that occurs at a swing low, be sure to read the lesson on the double bottom pattern. A double top is only confirmed once the market closes back below neckline support. The trade setup is formed when the market retests the neckline as new resistance. First things first, we always want to use price action to identify potential targets for any chart pattern. Because we’re trading this double top pattern on the daily chart, we would need to wait for a daily close below neckline support. Here we have a double top that formed on the EURUSD daily chart.

Advantages of the Double Top Pattern Forex Trading Strategy

Of poor price performance the stock will begin to stabilize then gradually move higher. In most cases this advance will occur because of some fundamental factor like an upcoming analysts meeting, earnings report or stock split. As the stock rises volume slows and investors who bought at the first top get ready to exit positions into further strength.

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Therefore setting a wider standard-deviation parameter is a must. This element is even more significant to the validity of a double top than volume. He argues the decline in price that occurs between the two peaks should be consequential, amounting to approximately 20% of the price. The deeper the trough between the two tops, the better the performance of the pattern. The double top pattern occurs because most investors that buy a stock “wrong” will refuse to exit until they can do so without suffering a loss.

Use RSI indicator or Price action to identify the overbought conditions. When the advances to the second peak, look for a decrease in volume as a further indication of weakening demand. We use the information you provide to contact you about your membership with us and to provide you with relevant content. Partnerships Help your customers succeed in the markets with a HowToTrade partnership.

Let’s say a https://g-markets.net/r identifies the Double Top pattern, but rather than forming a second bottom, and the price continues in the upward direction. Therefore, traders can apply indicators like RSI or Stochastics to first confirm the trend’s direction and then look to trade the pattern. Inhibits the continuation of a bullish trend on two consecutive occasions. Two peaks above a support level define the “double top” formation, generally referred to as the neckline.