Hi Traders. Today's topic is about one of my favourite reversal setups of all time. If you are constantly searching for the perfect double top pattern or you are looking to add a reversal strategy into your trading plan, this post is dedicated for you. Let's get into the story behind a double top pattern. Imagine yourself trying to get through a concrete wall by banging it with a hammer, banged once, you took a bit of break. Banged twice still failed, you are frustrated and eventually give up because it consumes too much energy or you're planning to come back another day, giving yourself enough time to recharge so you could return with more energy and power. Eg. In an uptrend, buyers attempt to breach a key resistance level but there are too much selling pressure against them OR buyers are simply taking their profit off. Price then pulled back and have the second attempt, still do not find enough bullish momentum enough to get through the barrier, buyers eventually give up and sellers then step in with increased selling pressure taking control of the market. There are some of the double top variations that I've traded from time to time.
1. Regular (Equal high) - This is the typical textbook double top, where the market creates an equal high double rejection, followed by a strong reversal.
2. Distribution top - This variation is something occurs very often, where most traders find it misleading and get hooked into the opposite direction. The second top looks like a 'buildup', breakout sort of situation. Usually the distribution (consolidation) phase will take some time, It is the gradual exhaustion of buyers attempting to breach the resistance zone but fail multiple times. Eventually It results in some rollover/ rotation, reversing downwards as buyers are slowly quitting and big sellers are accumulating their sell orders in a discrete manner. In this specific variation I'd often use the 18 ema & 50ema to identify the gradual shift in momentum, ideally ema crosses to help me with finding the sweet spot for entries.
3. Probe variation - One of the biggest mistakes majority of new traders make is the false concept of 'stop hunting'. As an advice, support or resistance are zones where the majority expects the market to respect, It is NOT a level or specific price point. If you are constantly putting your SL overly tight, you will get stopped out very often simply because you do not understand the purpose of a SL. SL is nothing but a trigger that invalidates your initial thesis, never treat it as a tool to maximize your position size, allow the market to breathe. The concept of fake out/ probe is straightforward, price attempt to violate certain key levels, but there's an immediate force (disagreement) pushing the price back into the range, this is what creates a wick rejection. There are times where sellers do not find enough liquidity to reverse the market, so they simply identify a level where the majority place their stops, hitting that zones before it goes into the opposite direction.
4. Lower high - This happen because the market do not have enough 'steam' to get back to the previous high, It then eventually rejects the previous minor support turns resistance, followed by a complete reversal.
Avoid looking for the perfect setup, flexibility is important.
Trade safe.
Do follow my profile for daily fx forecast & educational content
1. Regular (Equal high) - This is the typical textbook double top, where the market creates an equal high double rejection, followed by a strong reversal.
2. Distribution top - This variation is something occurs very often, where most traders find it misleading and get hooked into the opposite direction. The second top looks like a 'buildup', breakout sort of situation. Usually the distribution (consolidation) phase will take some time, It is the gradual exhaustion of buyers attempting to breach the resistance zone but fail multiple times. Eventually It results in some rollover/ rotation, reversing downwards as buyers are slowly quitting and big sellers are accumulating their sell orders in a discrete manner. In this specific variation I'd often use the 18 ema & 50ema to identify the gradual shift in momentum, ideally ema crosses to help me with finding the sweet spot for entries.
3. Probe variation - One of the biggest mistakes majority of new traders make is the false concept of 'stop hunting'. As an advice, support or resistance are zones where the majority expects the market to respect, It is NOT a level or specific price point. If you are constantly putting your SL overly tight, you will get stopped out very often simply because you do not understand the purpose of a SL. SL is nothing but a trigger that invalidates your initial thesis, never treat it as a tool to maximize your position size, allow the market to breathe. The concept of fake out/ probe is straightforward, price attempt to violate certain key levels, but there's an immediate force (disagreement) pushing the price back into the range, this is what creates a wick rejection. There are times where sellers do not find enough liquidity to reverse the market, so they simply identify a level where the majority place their stops, hitting that zones before it goes into the opposite direction.
4. Lower high - This happen because the market do not have enough 'steam' to get back to the previous high, It then eventually rejects the previous minor support turns resistance, followed by a complete reversal.
Avoid looking for the perfect setup, flexibility is important.
Trade safe.
Do follow my profile for daily fx forecast & educational content