Double tops and Double bottoms explained

Here is the whole crux of our trading strategy, the formation of Double Tops and Bottoms, when a double top has formed the we are looking to sell the market, when a Double Bottom has formed we are looking to buy the market. Below are a couple of examples of a Double Tops and Double Bottoms forming.

Look closely at the Footsie 100 hourly chart circled from left to right our first Double Bottom to form, this indicates a BUY signal you will note that the base of both candles have formed on the same line which was at 4171.0 note that both candles have formed wicks at the bottom of each candle. This indicates the market has tried to push down but failed. The long green candle went up to 4260 a possible 89 points profit. This upward movement comes to an end when a Double Top forms, again both the candles shoulders have formed on the same line 4257.3 indicating a BUY signal both candles have formed small wicks, but it is the shoulders that count. The market moved down another 16 points (bottom of the wick on the next red candle). Another Double top forms on top of the next green candle SELL note the long wick on the green candle (market tried to push up but failed) our shoulders on the candles formed on the same line 4280.5 and the market moved down to 4163 a possible 117.5 points. Another Double bottom forms at 4145.9 again note the wick on the red candle (market pushed down but failed) the next green candle went up to 4182 a possible 36 points. These Double tops and bottoms occur ALL of the time in selected markets.

Examples of typical double tops

We have established that the formation of a Double Top is one of the signs we look for to open a sell trade. As you can see above a when a green candle has completely formed (one hour on our chart) and is followed by a red candle with the shoulder forming on the same line. We have a good indication the market is about to change direction and fall. To reinforce this direction our 5EMA and 20EMA will also give us clues also the Williams %R will also indicate a change in direction being overbought.

Examples of Double Bottoms

We have established that the formation of a Double Bottom is one of the signs we look for to open a BUY trade. As you can see above a when a Red candle has completely formed (one hour on our chart) and is followed by a green candle with the bases forming on the same line. We have a good indication the market is about to change direction and rise. In the above example the doubles bottoms have formed on the same line twice which indicates very strong resistance on this line, in such a case I would expect the second BUY trade to be very strong indeed. To reinforce this direction our 5EMA and 20EMA will also give us clues also the Williams %R will also indicate a change in direction being overbought.

Using the Williams %R indicator and the 5EMA – 20EMA to reinforce trades

Note: when our first double bottom appears the Williams %R is oversold (the line graph is below the bottom support line) Also note that we have an EMA crossover, a very strong buy trade. We would be looking to get out of this trade once the Williams has moved above the resistance line (once the graph line has broken through the top parallel line) Note: when our second double bottom appears again the Williams %R is oversold, also we have an EMA crossover. The moving averages are drifting farther apart and which indicates the market is moving strongly in our favour. We would be looking to get out of this trade again when the Williams is overbought and changes direction. This happens with a formation of a Double top and long wicks on top of the candles, indicating the market cannot move any higher. With practice all of this will become very clear.

Again a perfect example of all our indicators coming together, we have a double- double top (indicating that the second trade should be very strong)

The Williams is overbought and our 5EMA is changing direction. We would be looking to get out of the trade when the Williams move’s to an oversold position.

“GOLDEN RULES FOR TRADING

Formation of a DOUBLE TOP or DOUBLE BOTTOM

Williams %R Overbought – Above 20

Williams %R Oversold- Below 80”

Long Term Trading (using the daily chart)

If you do not have time to watch the market on an hour to hour basis through the day, remember that you can trade right to 9.00p.m. It is possible to place long term trades. Therefore trades that can last days weeks or even months. This will take a little more work on your behalf, later I have listed the markets in which the system works. But basically you will need to scan through these markets on a evening or weekend to look for markets showing a clear sign of a change in direction, the signals are exactly the same as the ones using the one hour chart. Take a look below at the Footsie 100 on the daily chart:-

This trade was opened on the 20 th of May 2008 the market was 6357.0. It would have been possible to stay with this trade until the Williams which remained oversold from the 22 nd of May right through to the 16 th of July, at this time you would have been looking to get out at around 5113.0 that’s a massive profit of 1244 points in 39 trading days an average of 32 points per day that a profit of £159 per day tax free trading to £5 per point. Trades like this are not unusual and you do not have the stress of watching the market on an hourly basis. Of course the downside is the time you must spend researching the markets. It is possible to be in on trades in multiple markets and increasing the above mentioned profit to massive amounts.