Trading the Double Top Pattern
The basic principles for trading the double top pattern are the same as for the double bottom pattern. Once again, the pattern is only activated once there is a clean break and a close below the neckline, preferably on a daily basis. This way, you protect yourself against the failed breakdowns, when the price action briefly trades below the neck line without actually breaking it.
Once the USD/CHF sellers bring the price action to the point where the previous pullback lower ended, their goal now is to create a lower low and initiate a new bearish trend. They become successful in their mission as there is a break of the neckline very quickly.
Similar to the head and shoulders reversal pattern, the double top offers two types of entry. First is a more aggressive entry, as you enter the market as soon as the candle closes below the neckline.
The second route is based on a more conservative approach as traders wait for the price action to return higher to retest the broken neckline - a throwback - before entering the market at a higher (better price).
This approach offers a better risk-reward ratio, but the chance of you missing out on a trade is also higher as the move higher may never happen. On the other hand, the first option offers you a mandatory ride in a trend, however, the entry may be quite lower.
In this case, USD/CHF never offered us a second choice as the price action flushed lower. There was a minor rebound higher, but it never reached the broken neckline. In this case, our entry is at $0.9760, a level where the USD/CHF closed below the neckline for the first time.
The stop-loss should be placed above the neckline, allowing some space for a potential failed breakout, if the price action rebounds to retest the neckline. Thus, we put a stop-loss at $0.9820, around 30 pips above the broken neckline. Please remember that any move and close above the neckline invalidates the activated double top pattern.
The take profit is calculated in the same manner as it is the case with the double bottom pattern i.e. measuring the distance between the resistance (double top) and the neckline. The same trend line is then copy-pasted from the point where the breakout occurred, with an end point of the trend line being our take profit. In our case, the trend line ends around $0.9530.
The USD/CHF pulls back all the way to $0.9540, around 10 pips from our take profit. As with a stop loss, it is always advised to leave some room for the take profit, as some traders may exit their trades earlier. Ultimately, this trade banked us 220 pips while we risked only 30 pips.
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