Candlesticks, Fibonacci, and Chart Pattern Trading Tools : a synergistic Strategy to Enhance Profits and Reduce Risk

DOUBLE TOPS AND DOUBLE BOTTOMS
Double top and double bottom formations are the most common rever-
sal patterns. If double top formations occur after an uptrend, they are
called “M” formations; after a downtrend, double bottom formations
are called “W” formations.
Although most traders are familiar with these two chart pat-
terns, it is helpful to study them because the basics covered here are
applicable to more complex strategies later on. For example, tops
and bottoms are very important when working with Fibonacci price
corrections.
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APPLICATIONS OF TRADING STRATEGIES
Basics for Working with Double Tops and Double Bottoms
Double tops and double bottoms can happen in any price swing, big
or small, weekly, daily, or intraday. In very small swing sizes, they
may look attractive for trading. After deducting commissions and
slippage, however, little prof it remains in long-lasting sideways 
patterns. Bigger swing sizes are preferable to work with, but they
have fewer trades. The ideal M formation has both peaks at almost
the same level. With W formations, the same should be true for 
both valleys.
Having the same level is not critical for success. Although the
second high is slightly higher than the f irst high, a sell signal can be
prof itable if the expected swing size is reached. A double top pattern
is only complete if the valley between the two peaks is broken by a
daily close (when working with daily data).
A double top is diff icult to identify if the second top is higher
than the f irst top. It always makes traders question whether to expect
a higher price or a “bull trap.” The following compromises may be
helpful in dealing with this problem:
• When working work with daily data, the daily close has to be
higher than the f irst peak.
• The market price must go 3 percent higher than the f irst peak.
• Two daily highs have to be higher than the f irst peak.
These are not optimal f ilters, for waiting can mean getting in
very late and missing a prof it opportunity. But false breakouts are
costly as well and can cause big losses in an account. When the clos-
ing price is lower than the f irst peak in a double top formation, a false
breakout can indicate a price change.
Swing Size
The most important determiner of success with double top or double
bottom formations is the swing size that the trader chooses for
analysis.
The application of swing sizes that are too small will generate
excessive commissions and slippage.
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