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Chapter 14, Part II. Double top and Double bottom. Page 7

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 20, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    How we can trade this pattern alternatively? See small white candle on monthly chart? But it is small only here. If we drop our timeframe to weekly or even daily – you’ll see that this move is not so small there. Let’s scaled down the area of second top in blue circle to weekly time frame, i.e. drop our time frame to weekly chart.


    Chart #4 | JPY/USD futures weekly. M-top pattern
    [​IMG]

    Here is weekly chart. You clearly see our Double top pattern. So, the strong move down from the second top to 0.7705 area – this is our long black candle on monthly chart. But look – the small white candle that we’ve just discussed in reality is an excellent 0.382-0.50 retracement on weekly time frame. But you can ask – and how do we know that we should use precisely this retracement as our entry point?

    For that purpose we should collect all the puzzles pieces together. But before that let’s add another one – see, the weekly trend is bearish and it holds bearish, even when the market shows this retracement up. So, what do we have?

    1. Market is forming potential double top pattern;

    2. Second top is W&R of previous highs and some bearish candlestick pattern;

    3. Monthly trend is bearish, even more – trend remains bearish, when the market has formed a second top;

    4. We clearly see shifting in momentum – the market shows a strong up candle to the second top and a strong black candle out of the top;

    5. The market shows thrust down on the weekly time frame;

    6. The weekly trend is bearish and it holds bearish during the retracement up.



    Do you see here, at least a single reason to enter Long? Although we have not yet studied using of multiple time frames for trade entry (it will be a bit later), here we just join some facts of weekly and monthly timeframes. Usually when the monthly trend is bearish and the weekly trend is bearish, weekly price action confirms the trend (i.e. showing a thrust down) and market is not oversold – you may use the nearest retracement up on the weekly time frame for entering on the short side of the market. That’s the move we’ve made here.

    Here we didn’t know that market will reach 0.5 resistance, but even as we’ve entered from 0.382 - this will be almost perfect entry point. Our stop could be placed somewhere above 0.618 or 0.786 Fib resistance level. And this way of stop placement is absolutely logical, because we assume appearance of Double top – with a strong reversal pattern. The market should not show any deep retracement till it will reach neckline.

    Once we’ve entered and market reaches neck line, you may act in different ways:

    – Move your stop loss order to breakeven and watch the movie. You will be absolutely calm with neckline’s breakout process, because you already have a profitable position. If the Double top will fail – you loose nothing. If it works – you’ll get more profit. Just think about it – when most traders will fall in doom & gloom of neckline breakout, getting bets will it happen or not and nervously sit at computer tracking every tick and gnawing their nails – you will be absolutely calm.

    – Second possibility – take half of your profit and hold another half of position intact. Move your stop loss to breakeven on the half you leave open. This is my preferable decision. Although you’ll get less profit if the Double top works, you’ll get profit anyway even if it fails. Our task on the market is not to prove that we are right, but to make a profit. So, I prefer to leave the market with some profit at any scenario, instead of with no profit in one case and a larger profit with the other. I’m not a gambler – double or nothing…
     
    Hamza Samiullah and fran alvarez like this.
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