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Author: davidleetgydotcom   |   Latest post: Fri, 23 Jun 2017, 09:37 AM

 

How to trade Double Tops & Risk Management(For Beginner)

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What are Double tops? 

Double tops are price actions that shows strong signals of downtrend. Like engulfing patterns, double tops are simple and thus we trend followers do use them roughly identify long term bearish trend in FKLI, FCPO and also other indices and commodities futures.

How to identify double tops

Double tops are easy to identify, provided you know the context to it. Simply identifying double tops without the right context may cause unnecessary risks and losses to your trading account. To avoid this, we will look at the key components of a double tops price action.

double-top

1) Day Chart Time Frame

To reduce market noise and probability of false double tops, it is best to hunt for double tops in day charts.Weekly charts also can be considered at the cost of a slower signal.

2) Previous trend is Uptrend

Because we are hunting for a trend reversal, the markets must be in a strong uptrend for weeks and months.

3) First Top

The first top will be the highest swing of the current uptrend. Take note, as trend followers we may still be in a long position as the first top does not automatically mean the market has reached its top. The market may resume strong uptrend.

4) Retracement & Support

After the first top, then comes a small retracement followed by few days of sideways movement and finally a small rebound. That this point of time, we can draw a new support line at the sideways movement and add new longs or holding onto our existing long positions. Our uptrend target will still be our first top.

5) Second Top

When prices reached the first top but then unable to break the resistance for few days, we will identify it as the second top. It is normal to have our first top at 1,700 while 2nd top is at 5-7 points above or below the first top.

By this time we may exit some of our positions for profit or tighten our trailing stops if decided to hold all our longs. That being said, it is still early to say a double top.

6) Break of Support Level

When prices fell from the 2nd top and then breaks the support, that is where a double top price action has formed. The support that has been broken will now be resistance and a risk management tool.

 

How to trade Double Tops & Risk Management 

FKLI Example:

fkli-double-tops

FKLI had a spectacular uptrend for the past few weeks until it reached the first top at 1,890. Since then prices retraced and rebounded from support 1,842. This is followed by continuation of uptrend until second top 1,895-90 zone for few days. Afterwards it fell and finally broke 1,842 support. Based the latest information at time, a double top is form and FKLI may start a strong long term downtrend. However, no trading strategy or price action or candlestick pattern is 100% right all the time, thus we take 1,842 as cut loss.

FCPO Example:

fcpo-double-top
How to trade when we see a bullish engulfing?

As seen in the chart above, FCPO had a strong uptrend for the past few weeks until it reached the first top 2,795. This followed by retracement and rebound at 2,740 support. Afterwards FCPO resume its uptrend for few days before reaching around 2,795 again. Finally FCPO fell down and broke 2,740 support. At this point of time we never know FCPO will 100% start a strong long term downtrend but we can use 2,740 as a cut loss zone for us. Keep in mind of your risk appetite and whether you can achieve your desired 1:2 risk reward ratio with you use this 2,740 support as cut loss.

This is how we use double tops to roughly identify trend reversal and ride on its profits. Double tops are simple to use once you understand the context. That being said, there are few Trend Following strategies that can be used to minimize the risks and maximize the returns when trading double tops. These strategies are included in our lifelong TFM futures program.

DISCLAIMER

The information contained in this article is for reference. No individual financial goals & risk appetite have been taken into account. Futures trading involve high risks.

 

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