The "Double-Top" Analysis

[the_coumiester]

Hello; new member here. Call me Cou, it's probably not as cool to you, since it rhymes with the flu... who knew... that something so lame could stew?

Yeah, anyway, I had a question about the "double-top". I understand the concept, sort of, that a charting pair will show two increases that make an "M" symbol, but does the chart follow only with a decline, and never another rise? And how is it really different than the fluctuation of the charts in the first place?

Thanks!

 

[enragedcow]

if the price bounces off an area twice then that area's probably significant

the pattern is confirmed if price passes through a line drawn under the v part of a ^v^ shape

look at a xau/usd daily chart and there's a nice triple top that formed some months ago (near beginning of this year sorry no charts up atm) which was confirmed and then failed

 

[DionysusToast]

Double tops will not 'work' the majority of the time, nor will they 'fail'.

The reason for this boils down to the fact that the markets are very good at weeding out inefficiencies.

Let's consider a hypothetical scenario. Let's say that in 90% of cases the following happened.

1 - Market makes a new high
2 - Price retraces down and makes a higher low
3 - Price moves back up to the point of the prior high
4 - Price hits that high and them proceeds to revers back down

If this occured 90% of the time, it would give you a chance to make money 90% of the time and only lose 10% of the time. It would also effectively allow you to have a 1 tick stop and a much larger target.

This is an extreme example but if you think about this scenario, it would be doomed to fail. It's existence would cause its demise.

Similarly - just as this sort of thing cannot work 90% of the time, neither can it fail 90% of the time, for the very same reasons.

 

[enragedcow]

Double tops will not 'work' the majority of the time, nor will they 'fail'.

The reason for this boils down to the fact that the markets are very good at weeding out inefficiencies.

Let's consider a hypothetical scenario. Let's say that in 90% of cases the following happened.

1 - Market makes a new high
2 - Price retraces down and makes a higher low
3 - Price moves back up to the point of the prior high
4 - Price hits that high and them proceeds to revers back down

If this occured 90% of the time, it would give you a chance to make money 90% of the time and only lose 10% of the time. It would also effectively allow you to have a 1 tick stop and a much larger target.

This is an extreme example but if you think about this scenario, it would be doomed to fail. It's existence would cause its demise.

Similarly - just as this sort of thing cannot work 90% of the time, neither can it fail 90% of the time, for the very same reasons.

Won't argue the bolded part, that's the self-fulfilling vs self-annihilating debate: really deserves an academic journal and millions of dollars in research funding devoted to it.

I use the word "fail" because jack schwager uses it in his book when explaining patterns because Jack Schwager uses it in his book "Schwager on futures, Technical analysis"

It's simply saying that "this pattern usually does this, trade it like it will" "oh look it did the opposite so it's failed"

 

[the_coumiester]

I'm kind of not following the responses here. (Meaning I'm confused.) I was able to find an archived article from 2009 explaining a "how-to" trade with the Double-Top (and double-bottom). I'll post the link. Overall, I guess I just don't understand this because the market moves up and down all the time - the double top/bottom is talking about something hitting the exact same price?

Trading Double Tops and Double Bottoms

 

[enragedcow]

I'm kind of not following the responses here. (Meaning I'm confused.) I was able to find an archived article from 2009 explaining a "how-to" trade with the Double-Top (and double-bottom). I'll post the link. Overall, I guess I just don't understand this because the market moves up and down all the time - the double top/bottom is talking about something hitting the exact same price?

Trading Double Tops and Double Bottoms

i'm going to be flamed for this response...

in answer to the bolded part. In my opinion the level the price hits and then goes down does not need to be the exact same price just some range although not such a big range as to make it completely arbitrary.

this image shows what i'm talking aboot

 

[barjon]

aye, you're not talking about the exact same price but round about the same place.

you can trade it as EC examples above or to use DT's thoughts.

So, at a double top you can:

assume it will reverse and go short, or
assume it will break through and go long, or
assume it will pretend to break through, so go short as soon as it goes through, or
assume it will pretend to reverse, so go long when it pulls backs

take your choice

jon

 

[Splitlink]

i'm going to be flamed for this response...

in answer to the bolded part. In my opinion the level the price hits and then goes down does not need to be the exact same price just some range although not such a big range as to make it completely arbitrary.

this image shows what i'm talking aboot

IMO, although your chart is showing the start of a DB, it is far to big a range. The stops would frighten me off! There are other DBs on lower ranges which would give a lower risk.

Everyone does his own thing, of course. The main thing is to be comfortable with one's potential loss.

 

[DionysusToast]

aye, you're not talking about the exact same price but round about the same place.

you can trade it as EC examples above or to use DT's thoughts.

So, at a double top you can:

assume it will reverse and go short, or
assume it will break through and go long, or
assume it will pretend to break through, so go short as soon as it goes through, or
assume it will pretend to reverse, so go long when it pulls backs

take your choice

jon

Option 5...

Stay out of the way because you know these are obvious areas for retailers to get in and professionals run them over.

Seriously - why do we need such visually stimulating areas to trade off?

 

[wallstreetwarrior87]

Seriously - why do we need such visually stimulating areas to trade off?

And why give any meaning/importance to it? "Fails", "Achieves", blah, blah, blah.

These Schwager books et al have a lot to answer for

 

[the_coumiester]

aye, you're not talking about the exact same price but round about the same place.

you can trade it as EC examples above or to use DT's thoughts.

So, at a double top you can:

assume it will reverse and go short, or
assume it will break through and go long, or
assume it will pretend to break through, so go short as soon as it goes through, or
assume it will pretend to reverse, so go long when it pulls backs

take your choice

jon

Ahhhh, okay, so there is no way to really have a pinpoint as to what it's going to do after the double-top happens? What are the chances that it'd continue in an uptrend?

Also, is there any relationship to the space of time a double-top would appear in? For example, and I'm just guessing here, would a short period of time indicate a rally and a then a longer period of time, it would fall?

Thanks for all the responses thus far, guys.

 

[wackypete2]

Has anyone tried Euro Daily Trader from theforexclub.eu?

SPAM, SCAM, SCRAM.

Peter

 

[MajorDutch]

Ahhhh, okay, so there is no way to really have a pinpoint as to what it's going to do after the double-top happens? What are the chances that it'd continue in an uptrend?

Also, is there any relationship to the space of time a double-top would appear in? For example, and I'm just guessing here, would a short period of time indicate a rally and a then a longer period of time, it would fall?

Thanks for all the responses thus far, guys.

there is no way to tell exactly what is going to happen at a double top. you could consider the following questions about the double top:

1. Did it occur at previous support/resistance/price pivot zone on a higher t/f to the t/f that the double top set up on.

2. If considering a trade is there any order flow (i.e. news) that is scheduled in the near future.

3. If the double top turns out to be a reversal on that t/f what does this mean on the higher t/f's, are you re-entering a long term trend.

4. what 'space' do you have if considering a trade. i.e. what is the distance to the next level of previous price consolidiation/chop.

5. depending on what price representation you are using (line, bar, candles) what is this showing you immediately at and after the double top.

6. what is the overall price action that the double top appears. Are you in a strong trend extending to higher t/f s, are you in a range, beware of going against a strong trend that extends to high t/f s.

I hope from this you can see that a double top on its own means nothing (imo). I learnt much of my methods from BBmac (member on here) who is very helpful and just an all round good guy imo. search him you will find his posts.

I am sure D.Toast is going to jump on me now and say Technical trading is basically witchcraft. I believe he trades purely off tape, i.e. time and sales. I know traders who make money using technical methods without time/sales/order flow, I also know traders who make money purely using time/sales/order flow. There are plenty of ways to skin a cat imo.

 

[Brock Landers]

double tops and double bottoms are labels given to chart patterns after they have happened.

 

[MajorDutch]

double tops and double bottoms are labels given to chart patterns after they have happened.

Hi Brock

I hear you. I am not a big fan of the H&S, rising wedge brigade. We are talking about reversals here?

 

[the_coumiester]

there is no way to tell exactly what is going to happen at a double top. you could consider the following questions about the double top:

1. Did it occur at previous support/resistance/price pivot zone on a higher t/f to the t/f that the double top set up on.

2. If considering a trade is there any order flow (i.e. news) that is scheduled in the near future.

3. If the double top turns out to be a reversal on that t/f what does this mean on the higher t/f's, are you re-entering a long term trend.

4. what 'space' do you have if considering a trade. i.e. what is the distance to the next level of previous price consolidiation/chop.

5. depending on what price representation you are using (line, bar, candles) what is this showing you immediately at and after the double top.

6. what is the overall price action that the double top appears. Are you in a strong trend extending to higher t/f s, are you in a range, beware of going against a strong trend that extends to high t/f s.

I hope from this you can see that a double top on its own means nothing (imo). I learnt much of my methods from BBmac (member on here) who is very helpful and just an all round good guy imo. search him you will find his posts.

I am sure D.Toast is going to jump on me now and say Technical trading is basically witchcraft. I believe he trades purely off tape, i.e. time and sales. I know traders who make money using technical methods without time/sales/order flow, I also know traders who make money purely using time/sales/order flow. There are plenty of ways to skin a cat imo.

Thanks again for the detailed response. (And for the hefty chuckle near the end, comparing technical trading to witchcraft.) Coupled with your response and Brock "Chuck Norris" Landers, with him saying that it's just a names given after the fact - I'd have to agree with you that they're pretty worthless.

Thanks for the help!

 

[barjon]

Option 5...

..............Stay out of the way because you know these are obvious areas for retailers to get in and professionals run them over..............

Surely that makes it a good place to trade, toastie, since there's a good chance there'll be some vigorous action at this point.

jon

 

[Bint_Crusher]

Depends on the market. Consider buying a house, the market on avg hits 100,000. (I am talking 10 years ago) demand for housing eventually outstrips supply so price rises, seldom does it ever sustainably fall. Same with stocks, most companies increase in value over the years therefore demand exceeds supply as private investors enlarge their portfolios.
The great thing about trading is we don't care about the company or asset, we just buy and sell higher. Or sell and watch the market tumble.
Adouble bottom is a better indicator, even if it becomes a triple or quadrouple bottom then it is an indication that the heavy Govt money is forcing the action.

 

[Splitlink]

Double tops, double bottoms, these are names that can mislead a person who does not have a chart in front of him at the time. To me, these are major pullbacks and, if the second high is lower than the previous one and the pattern completes then a new trend is in place.

My point is that when the secondary trend breaks upwards, in a top, it may only be experienced, not predicted. One must reach a decision and enter, keeping his stops within his own judgmental limits, aad be prepared to exit and/or reverse.

As a kid, playing on the heath, I used to tell my mates, when that cloud reaches those trees, I'm going home. Just a point in the sky that was a decision point for me and had to be acted upon. That is what these patterns are, to me, today, because, frankly, they can go in either direction, can't they?

I don't believe that they can be analysed. They, simply, are. The rest is hindsight.

Successful traders make mistakes over them just as much as unsuccessful ones. What makes them different is that they cut their losses much sooner while the others watch their losses accrue.

 

[barjon]

Couldn't agree more, split. All these things do is give you a reason to make a trade . When you take the trade you are merely making an assumption about which way price will go (albeit that the assumption may be supported by some expectation of how such things have turned out in the past) and the real business starts from there.

The difficulty is that price often staggers about like a drunken sailor and if you pick him up as he leaves the bar on the assumption that he's going back to his ship, he might lurch off in the wrong direction before he gets his bearings, or he might be searching for a new bar even further away from his ship, or he might just stagger around aimlessly until the dawn. Trying to make sense of his erratic progress likely involves making further assumptions and since they are just as likely to have the same difficulty you might just as well use your "cloud technique" and leave him to it at a point that doesn't involve too long a walk back to your starting point.

jon