Tips to Trade a Double Top Pattern
A double pattern is one of the most commonly used technical structures. It can be found in the arsenal of any trader despite the level or experience. A double top makes it possible to enhance technical analysis no matter what you trade (stocks, currency pairs, or Forex).
In this article, you will learn:
- What a double top pattern is.
- Ways to identify and use it.
- How a double top works.
- The difference between a double top and a filed double top.
- Additional tips to use together with technical analysis.
What Is a Double Top Pattern?
A double top is to depict the two high points on the market that are generally associated with the bearish reversal signal. The two high points form a zone where it is possible to measure the price decrease featuring the resistance between the price highs.
In other words, we have an instrument that shows a long or medium-term trend change depending on the asset type you trade. A lagging peak makes it possible to observe a slowing momentum with the help of other oscillators like RIS as a part of the technical analysis.
The market is likely but not obligatory to break above the first peak although even for a short period. In other words, traders can witness either a temporary or short break exciting the bulls to lower the trend or even reverse. This is what makes both a double top and bottom patterns very powerful instruments to be used in various financial markets.
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Tips to Identify a Double Top Chart Pattern
The process is pretty simple. Besides, it does not require much of a learning curve or enhanced skills. Simply follow the steps below to identify a double top on a chart:
- Locate the two distinct peaks that have the same height and width.
- Make sure the distance between the two peaks is not very short (of course, we should also consider the timeframe).
- Now you need to support the price level or confirm the neckline.
- Implement technical indicators that help to support bearish signals. They may include oscillators as well as moving averages.
How A Double Top Differs from a Failed Double Top
The difference between a double top and the one that failed is huge. Keep in mind that a real double top pattern is likely to lead to a sharp and rapid price decline. It results from the fact the pattern appears to be an extremely bearish instrument used within the technical analysis.
On the other hand, discipline always matters. Traders should keep patience in order to make proper decisions. It is vital to identify the critical support level as well as have the double top identity confirmation. The incorrect reading of the false peaks that are consecutive may result in an early market exit from a potentially profitable position.
Besides, we need to take into account some double top limitations. These formations may help in a great way but only when read correctly. False identification will make them useless and sometimes even risky for the trader. So, make sure you have the signal confirmation before jumping to a specific conclusion.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.