One of the popular reversal price pattern is Two peak model. Along with its twin brother, the double-bottomed model, these price patterns often appear on technical price charts. Two peak price model Very high application value in forex trading, securities or virtual money ....
Describe the two vertices model
Visually, the two peak pattern is shaped like two mountains, or more simply like the letter M. This pattern is often located at the end of an uptrend. It is a sign of trend reversal from up to down.
Characteristics of the two peak price model
Visually, you can see in the image above. However, these are only the most basic descriptions of a two-peak model. To better understand, you need to know about the specific characteristics of this model as follows:
- The two vertices (Top 1 and Top 2) may be horizontal or slightly higher or lower. Connecting these two vertices will form a horizontal line or slightly slanting. This horizontal line is also the resistance line later.
- In between the two vertices there is a temporary bottom. This is the natural correction in an uptrend when the price moves a piece.
- A horizontal line that crosses the bottom temporarily is called a neckline and acts as a support. This neckline also often passes through a previous peak in the previous uptrend.
- After a two-peak pattern has been established, that is, when the price has passed through the neckline, it usually returns to test the neckline. When the test is successful, a new downtrend is formed. At this time, the probability of price reversal going down is very high.
Psychological developments in the two-peak model
Initially the price was in an uptrend. In an uptrend, the higher highs are higher than the previous highs.
The first peak (Top 1) is formed the same way as the previous peaks. The same is true for the temporary bottom adjustment between the two peaks. As prices continue to move up the old trend, encountering the first peak, it is not strong enough to overcome, this is the key to start creating a two-peak pattern.
When the price fails to surpass the first peak, the underlying cause may be due to a certain underlying factor affecting it. Such a negative information on the market impact on stocks for example. Or simply technically, investors feel that the price has risen too much and want to sell in order to make a profit. Like the previous peaks, but this time the belief that the price will fall is stronger. The belief was so strong that the selling overwhelmed the buying side, making the price exhausted and turned around.
When the price turned to go through the neck line, the negative sentiment was covering. Besides, it is also heavily influenced by investors who follow the technical analysis school. They found the two-peak price model was confirmed and started to compete. The resonance of negative sentiment along with technical analysis caused the price to reverse strongly.
Method of trading with a two-peak model
As you know, this is a trend reversal pattern from up to down. So when the double top model formed, we must have sold it for sure. But the question is how effective is the selling strategy?
Trading strategy with a double top model in the stock market
When this model appears, if you do not hold stocks, it is best to stand outside the market.
In case you are holding a stock whose price chart has a double top pattern, you should consider selling.
- As soon as the second peak forms, you should consider reducing that percentage of stock ownership.
- After you have formed a peak and the price goes down past the neckline, you should consider reducing the stock rate further.
- After the price has passed the neckline and returned to test successfully, you should consider selling that stock.
The above suggestions are only for those who are short term investors or surfing. However, for long-term stock investors, once you have analyzed and determined that this is a good stock, you have available cash for long-term investment, you only need to reduce the ownership rate. stock down, wait for it to come down and buy again.
Trading strategy with two peaks in the forex market
The advantage of the forex market compared to the stock market is that you can buy first and sell later, or sell first to buy later. So even if you do not hold goods in the account, when the double peak pattern appears, it will create an opportunity to sell down. The problem is how to sell the strategy most effectively?
- As soon as the next peak is formed you should consider a small sell order. At this time, the pattern has not formed yet, the probability of trend reversal is not high so you should only sell a small order. And do not forget to set the stop loss command above the top. When placing a sell order at this point you are most profitable because you sell at a bargain price. And if unfortunately the price does not reverse but go up, you will not suffer a lot of losses.
- When prices break out going down through the neckline, a double top pattern has formed. At this time, the probability of price reversal going down is very high, you place a second small sell order. And do not forget to set the stop loss between the neckline and the top.
- After the price has broken through the neckline and returned to the test. If the test price is successful and going down, you can now place a big order. Because after the test is successful, the probability is high that the trend will reverse. And do not forget to place a stop loss order between the neckline and the top.
Two-peak price model in practice
Real-world models are often not always clear for you to identify. The important thing is your trading experience as well as your analytical capabilities. Here I will put up some real-world two-peaked models for you to see more:
Figure below: The model has a lower peak than the previous peak
Figure below: The bottom between the two vertices is not clear
Figure below: Price does not penetrate right after forming a peak 2
Bottom image: The back peak crosses the previous peak and then back, forming the Pin bar on the top. A two vertex model with a pin bar at the back vertex will work.
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Author: Pham Khuong
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