For those of you who have followed my analysis over the years, I am not a big fan of double tops or triple tops. In fact, I often look for these setups to fail, simply because there will be a lot of stop loss orders above them, states Ashraf Laidi of AshrafLaidi.com.
These stop loss orders—or a pool of liquidity—usually act like a magnate and draw price towards it. Remember that the function of the market is to move from one area of liquidity to another.
To give you an example of what I mean, look at this daily chart of the USD/CAD, which is showing multiple equal highs at just above the 1.32 handle:
Source: TradingCandles.com
I obviously don’t know for certain whether those highs will hold, but I have seen these types of baits so many times. They make you think there is “strong” resistance at that level. While that might have been true in the past, it doesn’t mean that level will hold in the future. Often what happens is that price spikes through and takes out the stops before going back into the range. I think something similar might happened in the case of the USD/CAD, above.
If you think about where the market is likely headed, entering the actual trade becomes the easiest part. Assuming the USD/CAD in the above example does rise above the 1.32 handle, then you can take your first profit a few pips above those highs, where trapped shorts’ stop orders would be resting. You can leave a little in there in case the market continues higher.
Please note that the purpose of this article is purely for educational purposes as this is not a trade idea per se, given that I have not mentioned where the stop loss or invalidation level would be located.
Learn more about Ashraf Laidi at AshrafLaidi.com.
