The two sides of the double coin chart pattern are the double bottom and the double top patterns. Naturally, they stand in opposition to one another. While the double bottom pattern is generally regarded as an indication of an upcoming bull trend in the market, the double top, however, is an indication of a bearish momentum – a rather powerful one at that.
In this article, we want to go through the double top pattern and show how you can use it in your forex trades for a more desirable outcome and also compare it with the double bottom pattern.
What Exactly Is the Double Top Pattern?
In general terms, the double top can be considered a fully bearish indicator. The double top can be formed when the price of a trading pair in the forex market, or an asset in any other given financial market, hits two separate highs, and between them there is a moderate decline. Of course after the second high has been hit, a much stronger movement toward the negative side can be expected.
Naturally when the two highs are hit, on the bottom side of the pattern, also a new support level can be detected. When the new support level is broken through after the second high is hit, then it can be expected that a powerful bearish momentum has formed.
So for the double top to actually work out, the support level needs to be broken through. It is a little bit more difficult to form compared to its counterpart on the other side. But should it be detected, it is a truly powerful indicator of the bearish trend.
What Information Does the Double Top Reveal?
The double top is a momentum indicator. It is generally regarded that the double top is a good medium to long term indication of a bearish trend in the market.
It stands in opposition to the double bottom pattern which is taken to be a bullish trend indicator by and large.
The two tops of the double top pattern would normally form a new resistance level, which won’t actually be broken through, as the double top is the indication of an upcoming harder bearish trend. So when the second top is hit and the resistance line is formed, Forex traders can assume a short position and short the trading pair.
How Is a Double Top Pattern Drawn?
How Is a Double Top Pattern Drawn?
The general shape of a double top pattern would form the letter M which again stands in clear opposition to the double bottom pattern which forms the letter W.
But there are actual steps and stages when trying to identify a double top pattern. First, there needs to be an uptrend that would eventually go on to form the first high. When the first uptrend has reached its apex, then the first high out of the two is formed.
After the first high has reached its apex, there will be a mild and moderate downtrend. But that is just a compensatory move. It would reverse soon enough toward yet another uptrend.
This second uptrend would go on to form the second high of the pattern. The two highs put together create a new resistance line. This new resistance line would naturally not be broken. As it is an indication that the highest prices will go for now. When the second high is hit, the prices would take a turn toward the downside. This time much more powerful and harder than before – thus creating the bearish trend.
How to Successfully Use Double Top in Trades?
First and foremost, the main way to trade a double top is shorting the trading pair following the second high. When the second high is recorded, that is when prices would break though downward and keep falling. A compensatory move is highly unlikely, so it is expected that the bearish trend will form as strongly as expected. Naturally a short position is preferred at this point.
As it is the case with any other technical indicator and chart pattern, you need to place a stop loss in order to make sure you avoid losses. The best method for placing a stop loss is to put it over the latest high that has been recorded.
Difference Between Double Bottom and Double Top?
Difference Between Double Bottom and Double Top?
As it has been mentioned on more than one occasion, the double top and the double bottom patterns are almost quite perfectly the opposite of one another.
In the case of the double top, as we saw, the two highs form a resistance level. When in fact that resistance level is not and cannot be broken through, it shows that the momentum of the market is not bullish and it does not have the strength to break the resistance. What happens in fact is that the market will assume a highly bearish momentum for a while. This is how forex traders can short the market and benefit from the double top.
On the other hand, the double bottom forms a new support line. And when the support line cannot be broken through, it shows optimism among traders and that the market is about to take a bullish trend. As such when the double bottom is formed, forex traders can assume a long position and use the double bottom to their benefit.
Though, you need to keep in mind that these two definitions are the generic outcome that is expected from these two patterns. When in fact, it is always a possibility that the prices will break in the opposite direction. So always make sure a pattern is confirmed before depending on it for your trades.
Conclusion
The double top is among the most useful and practical chart patterns in technical analysis. It can provide forex traders with valuable information regarding resistance levels. And not just any resistance levels, but levels that can be reliable and powerful. The double top can be used by traders to find precise entry points and also exit points with the help of stop loss. There are many ways that can help confirm that double top will indeed take place. But at the same time, you ought to be careful about false signals.
In general, this bearish trend indicator is one of the best ways to analyze the market and find out where prices are about to fall down even further than before. The double top pattern is generally taken by traders as a powerful signal that they should start shorting the trading pair as prices are about to fall much further.
