The Double Top pattern is one of the strong reversal signals of the market. This is a chart pattern that warns the start of a strong downtrend. So what is a Double Top pattern? What types are there and how to use them effectively? All will be answered by me in this article.
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What is a Double Top pattern?
In Forex, the term “Double Top” is the name of a special chart pattern shaped like an “M”. This is a chart pattern that warns investors that the price has peaked and will fall in the future. This pattern is created when price creates a peak (left top) which is followed by a bearish pullback (right top). The trough between the two tops is called the central trough or the groove.
The pattern is completely created when the price breaks out of the support level (which horizontally crosses the central bottom) and goes down, creating a downtrend. In some cases, the price can retest the support that has just been broken (new resistance).
If you want to learn more about retest or do not know what it is, you can review this article: What is Retest? Why is it so magical in technical analysis?
Common types of Double Top patterns
Depending on the shape of each top formed within the pattern, we have 4 types of Double Top pattern: Adam – Adam, Adam – Eve, Eve – Adam, and Eve – Eve.
Adam represents the letter A which means that the top shape will be sharp. In this case, the price increases and decreases dramatically. Meanwhile, Eve stands for the letter n which represents the stretching of the price when it peaks. Let’s take a look at each of the following detailed examples.
Adam – Adam
This is a pattern with 2 A-shaped sharp tops. They are sudden increases and decreases in price. This is the 2nd efficient pattern out of 4 types of pattern.
A practical example of the Adam – Adam pattern
Adam – Eve
The Adam – Eve pattern consists of an A-shaped pointed top and a rounded n-shape top. According to evaluation, this is the least effective pattern among the common types of the Double Top pattern.
A practical example of the Adam – Eve pattern
Eve – Adam
This is a Double Top pattern with the first top stretched by many round candlesticks that look like the letter n. The second top is pointed like an A. This is also an ineffective pattern when the average decrease is not too large.
A practical example of the Eve – Adam pattern
Eve – Eve
This pattern appears when 2 tops are round and in n-shape. According to the study, this is a Double Top pattern that gives the best reversal signal with the largest average decrease.
A practical example of the Eve – Eve pattern
How to trade Forex and Binary Options with the Double Top pattern
As a strong reversal signal, a Double Top pattern often appears at the end of an uptrend. I will show you how to best open orders when this special pattern appears on the price chart.
For Forex
In order to get the maximum profit when trading Forex with a Double Top pattern, you need to open an order with the entry point, take-profit, and stop-loss as follows:
+ Entry Point: Right after the candlestick finishes breaking out of the support at the bottom. It means that once the candlestick closes, you open the order.
+ Stop-Loss: At the second top of the Double Top pattern.
+ Take-Profit: When the price reaches an increase by the distance from the top to the support level of the Double Top pattern.
For Binary Options
When trading Binary Options using this pattern, the safest and most effective entry point is the retest of the price after the breakout. In order for your transaction to be the safest, you should open orders with a long expiration time. This means that if you choose the 5-minute Japanese candlestick chart to look for a Double Top pattern, you should choose an expiration time of 45 to 60 minutes for your trade.
How to open an order.
+ Open a DOWN order when the price retests the support level of the Double Top pattern after breaking out.
The last line
To be able to make good use of the Double Top pattern in trading on real accounts, you need to get used to it and use it smoothly on a Demo account for at least 2 weeks. This is a very good and effective signal if you know how to use it correctly.
In my articles, I used images taken from Olymp Trade. This is a platform supporting both types of trading including Forex and Binary Options (FIXED TIME). If you do not have an Olymp Trade account, please register in the box below. I wish you successful transactions.
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The post What Is A Double Top Pattern? How To Trade Effectively With It appeared first on How To Trade Blog.
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