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

CHART PATTERN ANALYSIS
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Figure 3.21 illustrates ideal price moves that lead to double top
and double bottom formations.
As shown in the price patterns in this f igure, the double top for-
mation with peaks at points 1 and 3 is completed only when the val-
ley at point 2 between peaks 1 and 3 is broken on the downside, based
on a closing price. As an exception, it can happen that the second peak
at point 3 is higher than peak 1. A false breakout is an early indica-
tion of a trend change. The maximum swing size can be used as an
initial prof it target.
Triple Top and Triple Bottom
Triple top and triple bottom chart patterns are based on the notion
that three tops or three bottoms can be found almost at the same price
level. The forecasting value is the greatest if there is a good symmetry
Figure 3.21
Double top and double bottom.
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BASIC PRINCIPLES OF TRADING STRATEGIES
between the peaks and the valleys. Ideally, the distance is the same
from the middle peak (or valley) to the peaks (or valleys) to both the
left and right (see Figure 3.22).
A triple top chart formation is completed when the low, which is
before the third peak, is broken on a close basis. If the third peak in
a triple top formation is a false breakout, this is a strong indication of
a trend change. The total distance between the peaks and valleys can
be used as the initial prof it target.
Head and Shoulder Formation
The head and shoulder formation is the best indication for a trend
change. It looks much like the triple top and triple bottom formation.
The only difference is that in a chart formation at the end of an
uptrend, peak 3 in the middle is higher than peak 1 on the left side
and peak 5 on the right side. Ideally, the right and left shoulder should
be on the same height or at least close together. The connection be-
tween valley 2 and valley 4 is called the “neckline.”