In trading, we often encounter double top patterns. Understanding and proficient use of double top patterns will greatly improve our trading success rate. Today, we will show you the application techniques of double tops.
01 What is double top
In a period of market, there are sometimes two high points, and these two high points are usually located at the same horizontal line. This pattern is generally called a double top pattern. The formation of the second high is usually caused by the fact that the market cannot continue to rise after reaching a certain price, and then falls back to test the previous high again. This situation means that there is greater resistance at this position.
For the double top pattern, sometimes the second high point will briefly break through the first high point, but this does not mean that the double top will fail. The market may only be a short-term inducement. If it drops quickly, it will speed up the short entry. , Long positions are closed and the decline is increased.
The neckline of a double top is usually the low point formed between two highs/peaks. If the following market falls below this low (neckline), it means that the market reversal is established and the market may usher in a greater downtrend .
How to identify the double top pattern?
The length of the two highs/peaks is similar to the looseness
The distance between two high points/peaks should not be too small
Confirm neckline/support
Assist other technical indicators to confirm bearish signals, such as moving averages and relative strength indicator RSI.
02 Double top trading strategy
In the market, double tops are often used as sell/bearish signals. Next, we will analyze the trading strategy of the double top pattern from the perspectives of foreign exchange and the stock market, and how to use the double top pattern to confirm the entry and exit points.
Above is the weekly chart of the USD/JPY exchange rate trend. The above chart shows that the USD/JPY experienced a wave of rise and then reached the first high/peak. At the same time, as the RSI entered the overbought range, the exchange rate rebounded again to near the first high after a retracement, and briefly After breaking through the first high, it fell slightly and formed a second high/peak. At this time, RSI did not follow to set a new high, but turned to the downside, sending a top divergence signal, suggesting that the exchange rate is about to turn down.
In the above example, the exchange rate closing below the neckline is regarded as an entry signal, the stop loss is set at two high levels, and the target price can be set near the low point of the first wave before the formation of the double top. In terms of risk management, the specific risk-reward ratio for trading with double tops is 1:1.2.
In short, if the double top pattern is used and understood correctly, its accuracy will be very high. Supplemented by other technical tools can further enhance the accuracy of this form, and traders can do well in various markets.