DOUBLE TOP:
A double top is a pattern that occurs
at the top of the chart. It appears when the prices are in an
uptrend, reach a high, fall to a support, and rise again to the first
top area. At that point, the bears come in play; so, the prices are
unable to climb higher. If you look closely, you will see that this
pattern looks like an “M” in the
chart. This pattern is very powerful especially if you use another
indicator to confirm it. For this
strategy, we will use the MACD-Histogram, particularly the
divergences between prices and this indicator. You can use the double
top strategy in any timeframe you like.
The Rules:
When we see a double top formation with
a bearish divergence on the MACD-Histogram, we will short sell
the currency pair. The bearish divergence occurs when both prices and
the indicator rise, fall, and when prices start to go up again and
achieve a higher point, the MACD-Histogram can’t reach a new high.
You can choose between two entry
points. You can short sell the currency pair when the MACD-Histogram
starts to fall and it is above its centerline, or you can short sell
the currency pair when it breaks below the minor support it made in
this formation. The first entry point is more risky but it gives you
more profit if you’re right. This entry point is better if you are
using shorter timeframes (like, for example, the 15 minutes charts).
If you’re using larger timeframes like, for example, the 60 minutes
chart, it is better to enter in the previous support breakdown. At
this point, you have more confirmation that the double top formation
will successfully reverse the previous uptrend.
You should place your stop loss 1 pip
above the higher value that the currency pair reached during the
double top formation.
You should exit the trade if your stop
loss is reached or if the MACD-Histogram is below its centerline and
starts to rise.
Entry: Short GBP/USD at
1.7929
Exit: 1.7768
Profit: 161 pips
In this GBP/USD 1 hour
chart, the 2 lines represent the double top formation. If you look at
the MACD-Histogram, you can see that there is a divergence between
the prices and the indicator – while prices are moving up, the
indicator is moving down. We will enter a short sell order at 1.7929,
just at the bottom of the “M”. The MACD-Histogram will let us
know when it’s the best time to exit the trade. As soon as the
indicator starts to go up, we should exit the trade. The exit signal
came at
1.7768.
Entry: Short GBP/USD at
1.7720
Exit: 1.7674
Profit: 46 pips
In this GBP/USD 15
minutes chart, we won’t wait to enter in the “M” pattern
breakdown. As this is a smaller timeframe, we will place our short
sell order when the MACD-Histogram gives the signal. This happened at
1.7720. After entering the trade, we will need to focus on the
MACD-Histogram so that we know when to exit the position. This
happened at 1.7674, when the indicator gave a signal that it reached
the bottom.
Entry: Short GBP/USD at
1.8484
Exit: 1.8434
Profit: 54 pips
In this case, we will
place our short sell order when the MACD-Histogram makes a downtick.
Our entry price will be at 1.8484. As soon as the MACD-Histogram
gives an exit signal, we
will take our profits. In
this case, we will cover our short sell at 1.8434.
DOUBLE BOTTOM:
A double bottom is
the opposite of a double top. This pattern occurs at the bottom of
the chart. If you look closely, it looks like a “W” is drawn on
the chart. As in double tops, we will use the MACD-Histogram to
confirm the movement, particularly the divergences between
prices and the indicator. You can use this pattern in any timeframe
you like but, as in the double top, you should have different entry
points depending on the timeframe you are using. For shorter time
frames, we will enter on the second bottom of the pattern, when the
MACD-Histogram gives a buy
signal. On longer time
frames, we will place our buy order on the breakout of the “W”
formation, taking always in concern, in both cases, the divergences
on MACD-Histogram.
The Rules:
We will place a buy order
when we see a double bottom formation with bullish divergence on the
MACD-Histogram. The bullish divergence occurs when both prices
and the indicator fall, rise, and when prices fall to a lower point
or to the same point, the MACD-Histogram can’t reach a new low. You
can choose between two entry points. You can buy the currency pair
when the MACD-Histogram starts to rise while is below its centerline,
or you can buy the currency pair when prices break above the minor
resistance they made in the “W” formation. Just like in the
double top formation, the first entry point is more risky but it
gives you more profit if you’re right. We will use this entry point
in smaller timeframes (like, for example, the 15 minutes charts). If
we are trading in a larger timeframe chart like, for example, the 60
minutes chart, we will place our buy order
in the previous
resistance breakout. At this point, we have more chances that the
double bottom formation will successfully reverse the previous
downtrend. You should enter your stop loss order 1 pip below the
lower value that the currency pair reached during the double bottom
formation. You should exit the trade if your stop loss is reached or
if the MACD-Histogram is above its centerline and starts to fall.
Let us look at some
examples:
Entry: Buy GBP/USD at
1.7777
Exit: 1.7868
Profit: 91 pips
In this GBP/USD 1 hour
chart, we have a bullish divergence on the MACD-Histogram. On the
first bottom, the MACD- Histogram is lower than on the second bottom
but prices are in the same area.
We will enter our buy
order on the breakout of the “W”, at 1.7777. From this point, we
will look at the MACD-Histogram. Once the indicator decreases (and it
is above its centerline), we will have our exit signal. That happened
at 1.7868, giving us 91 pips profit.
Entry: Buy GBP/USD at 1.7623
Exit: 1.7676
Profit: 53 pips
We are now using a 15 minutes chart.
So, we will place our buy order not in the “W” pattern breakout
but on the second bottom, when the MACD-Histogram gives a buy signal.
As we always do, we need to see if there is bullish divergence on
MACD-Histogram before we enter the trade.
Although prices are in the same zone on
the two bottoms, the MACD-Histogram is higher on the second bottom
than on the first one. This means that the indicator confirms that a
double bottom is being formed. Everything is in place for a good
trade, so we enter our buy order at 1.7623. Now we need to keep an
eye on the MACD-Histogram so that we can maximize our trade. At
1.7676 the MACD-Histogram gave an exit signal; so, we closed our
position with 53 pips profit.
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