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Wednesday, January 2, 2013

Trading Double Tops and Bottoms

Here is a great article that Marsh had co-written with Richard Bernard. You can view articles like this and more by downloading Marsh's Learn to Day Trade the Emini SP Simple as 123 manual by visiting www.simple-as-123.net.

The step-by-step method we use to trade the E-mini S&P (ES) includes double tops and double bottoms. The market usually goes down after a double top while the market will go up after a double bottom.


First, we will describe only the double tops because the opposite is true for the double bottoms:
"A double top is when two candles, side-by-side, are equal at the top. The wicks of the candles can be different in length as long as the bodies are equal."

Trading Double Tops
Trading Chart showing Double Top

Moreover, if the tops of the wicks are equal yet the bodies are unequal, they are also considered a double top.
"If you are using a bar chart, the bars must be equal at the top and likewise at the bottom."
If you have more than two tops and they are equal at the top and at the bottom, the leading edge of the third candle is the direction of the move. If the third candle sets up at the bottom to make the third bottom, the move would be to the long side. Only the leading edge of this third candle should be considered.

Trading Chart showing Double Bottom

Now, please keep in mind that not all double tops and doubles bottoms work to the satisfaction of the trader; however, 70% of them usually do make money. There are three methods of working double tops and double bottoms. These three methods are: 1. Trading every double top and double bottom through the day. 2. Trade only the tops at the highest points of waves and the bottoms at the lowest points of valleys. 3. If you want to make your trading even tighter with less chance of error, only take double tops when the trend is down, while only taking double bottoms when the trend is up. This will lessen your chance of losing.

Nuance: Most reverses and pullbacks start with a double top or bottom.

Our particular style of trading is that of a scalper, looking for only one point once we enter the trade. You could vary the amount of your target to suit your trading style; however, you will find that there is usually only one point behind a double top or a double bottom, if you are playing method one. If you want more points out of your trade, you would trade only method two and three.
Next, and the most important of all, is to know how to tell when to get in and out of trades. Having both the $COMPX (NASDAQ = Combined Composite Index) scrolling price window and the Dow scrolling price window, (Scrolling price window is one we use from quote.com's live chart Time and Sales window.) you can view at least twelve prior prices. Since the Dow and the $COMPX are the driving force of the ES, one must know at all times where the Dow and the $COMPX are going because where the Dow and the $COMPX go, so goes the ES.
In order to trade with the least amount of risk, one must only trade when the $COMPX and the Dow are moving in the same direction. If you are in a trade, the same thing holds true; it will help you know when to get out of the trade. If you see the Dow go in reverse three numbers, get out! If you see the $COMPX go in reverse two numbers, get out!
If you are trading method one and taking only one point, it is wise to enter the trade when there is less than a half a point on a new candle. We use Stochastics (Classic Stochastics…set at 8, 3, 3. If you are using quote.com you can set it at 8, 3.) on Dow, $COMPXES and ES. Note: Marshall only uses Stochastics on the ES see more on Stochastics at the end of this tutorial.
For longer trades with more points, I use the simple Moving Average on the ES five-minute chart. The Moving Average is a good way to see a long move on the ES. If the Moving Average line is above the candles and you are in a short position, you will be able to tell when that position is being threatened. As long as the candles do not cross the MA line, you would stay in the trade. Likewise, the opposite is true for a long position. When the Moving Average line is below the candles and you are in a long position, you would also be able to tell when that position is being threatened by a reversal…See Moving Average Strategy in the manual.
Triple top or bottoms have a high percentage of winners, at least 70 %. of the time; they are very strong.
My personal recommendation is that you play only method three until you become familiar with this system.
One more very important rule is do not trade between 12 noon and 2:00 pm, you can start looking at 1:30 pm to try to get a feel for what the market is doing.
Richard uses Stochastics on all three charts: five-minute Dow, five-minute $COMPX, five-minute ES and ten-minute ES with the MACD. When all the charts are moving in the same direction, then you trade. Watch the scrolling prices on the Dow and $COMPX to help you decide what to do! Marshall uses the 15-minute ES chart with the MACD. We both use the default settings from quote.com at 12 - 26 - 9.

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