You are lost in the forest of strategies or lost your way when facing hundreds of indicators. Losses keep coming up in a row that you can’t find a way out. If so, have you tried to trade Forex with chart patterns? Certainly, with chart patterns, you will easily find profits and repel losses. This article will review how to trade using the Double Top pattern and make a profit of $1,750 in Olymp Trade Forex.
- 1 Review on opened Forex orders using the Double Top pattern in Olymp Trade
- 2 What is a Double Top pattern?
- 3 Identification characteristics
- 4 Psychological developments
- 5 How to trade effectively with the Double Bottom pattern
- 6 How to set a stop-loss and take-profit for a Double Top pattern
- 7 One last thing
Review on opened Forex orders using the Double Top pattern in Olymp Trade
Open a DOWN order when: A Double Top pattern forms and the entry point is at the breakout of the support.
The investment for each order is $500. The stop-loss is $250 (50%) and the take-profit is $500 (100%).
1st order: A Double Top pattern appeared when the price broke out of the neckline. Opened a DOWN order when the price crossed and closed the candlestick below the support zone.
The following peak was higher than the previous one but not more than 5%.
2nd order: A Double Top pattern successfully formed. Opened a DOWN order when the price broke out of the neckline.
3rd order: A Double Top pattern formed. At the breakout, opened a DOWN order safely.
4th order: A Double Top pattern appeared. Opened a DOWN order at the breakout of the neckline.
5th order: A Double Top pattern formed. Opened a DOWN order following the trend at the breakout of the support.
What is a Double Top pattern?
The Double Top pattern is also known as the M chart pattern. This is because its appearance is similar to the letter M. This is a bearish reversal signal, occurring at the end of an uptrend. It warns that the uptrend is weakening and a bearish reversal will occur.
In an uptrend, prices tend to make the following peak higher than the previous one in addition to the downward adjustments. When the price makes a new peak but cannot overcome the previous one, it means that the uptrend momentum is weakening.
Visually, it is easiest to see that the Double Top pattern has the same shape as the letter M. However, this pattern must appear after a previous strong uptrend. It very rarely comes out as a perfect M.
- The trend of the market before the pattern is formed must be an uptrend.
- In a Double Top pattern, the two tops have almost the same height. According to Bulkowski 2005, the price of the 2 tops should deviate from 3% to 5%.
- Before creating the second top, the market should adjust and create a bottom between the 2 tops. This bottom is called the central bottom.
- The horizontal line going through the central bottom is called the neckline. This neckline acts as a support level. Normally, this neckline will also go through a peak of the previous uptrend.
- When the price breaks out of the neckline, the M chart pattern is formed. There are 2 possibilities after the price breaks out of the neckline. One is that the price will drop straight down. Or else, the price will retest the neckline before officially reversing to decrease.
In an uptrend, the price will create the next top higher than the previous one and the next bottom higher than the previous one (optional). Alternating between the peaks will be downward adjustments. Downward adjustments are a very normal phenomenon of prices in financial markets.
The formation of the first top in a Double Top pattern is a fundamental rule in a bullish trend. After creating the first top, the market begins to adjust downward. At this time, if the bullish force is still strong enough, the price will continue to rise and create a second top higher than the first one before continuing to adjust downward.
However, when it gets close to the price zone of the first top, it doesn’t have the strength to break through. As a result, the second top is formed with a height less than or equal to the first one. In some cases, the second top can still be higher than the first top but not more than 5%.
There are two possible reasons for the second top not being able to surpass the first one.
First, the news in the market adversely affects the price of the asset.
Second, traders who have benefited from the previous uptrend begin to feel the price has risen high enough and decide to exit orders to take profits. The selling force is now stronger than the buying force so the price weakens and turns around.
When the price breaks out of the neckline – the strong support, the confidence in the downtrend increases. Outsiders quickly join in with expectations to profit from the new trend. As a result, prices will continue to plummet and the market will reverse from bullish to bearish.
How to trade effectively with the Double Bottom pattern
Everyone has a different strategy of opening an order when they encounter a Double Top pattern. There are 3 basic strategies to open orders that all traders use.
Strategy 1: for those who love adventure to get high profits
Open an order when the price breaks out of the neckline. When the price falls and closes below the neckline, a Double Top pattern is formed. Place a SELL order when the breakout candlestick closes.
In this strategy, traders will certainly not miss the opportunity to open an order when the price breaks out of the neckline. However, the risk can happen when it is just a false breakout. This is also the strategy to bring the least profit.
Strategy 2: Place an order after the price breaks out of the neckline and retests this line. The case of the price retesting the neckline also often occurs within a Double Top pattern. So there are also many traders who choose this strategy.
When the price touches the neckline and turns down, open a SELL order. However, in reality, there are many cases where the price penetrates the neckline and goes up for a few candles before officially reversing to decrease. This is also considered the retest of prices.
This strategy brings more potential profits than strategy 1 but you will easily miss out on some entry opportunities. Those are when the price does not retest the neckline but drops straight down.
Notes: Only open a SELL order when the price starts to cross the neckline from the top in this case.
Strategy 3: Draw a trendline for the previous uptrend. This trendline must go through the central bottom. When the price breaks out of the trendline, it is very likely that the price will continue to decline when it crosses the neckline. It means that a Double Top pattern will be formed, giving a signal of price reversal. In this strategy, open a SELL order when the price closes below the trendline.
The most profitable strategy is to place orders when the price breaks out of the trendline (strategy 3). However, this strategy also brings the most risks because at that time the chart pattern has not been officially formed. Therefore, the possibility of a trend reversal is low. Furthermore, when the price breaks out of the trendline, it can still turn up (false breakout) and resume the uptrend.
Then, what is the most effective strategy for trading? The most satisfying answer for all traders is: Try to trade with many different strategies and choose the one that brings you the most success. That is the most effective trading strategy.
How to set a stop-loss and take-profit for a Double Top pattern
Take-profit: at the position with the distance from the neckline that is equal to the distance from the central bottom to the highest price of the 2 tops. This is the target profit of the Double Top pattern. However, in fact, the price may drop further or only partially decrease (not yet hit the take-profit and reverses).
Stop-loss: several pips above the highest price of the 2 tops (depends on the timeframe used, the longer the frame, the more pips)
One last thing
Hopefully, through what we have shared, you will have a grasp of the Double Top pattern and how to trade effectively with this tool. There will be many more candlestick patterns, chart patterns, and other trading tools that we will share with you in the shortest time. Stay tuned to sanolymptrade.com so you don’t miss any of our posts.