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Identifying Double Tops and Bottoms

Identifying Double Tops and Bottoms

2010-06-08 22:34:00
Richard Krivo, Trading Instructor
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Instructor's Response:

 
First of all, keep in mind that the interpretation of candlestick charts has often been referred to as being more of an art than a science and I would agree.
 
As such, there is not a hard and fast number of candlesticks that need to occur between the two tops or bottoms. The greater the number of candles between the two the bettter.  The more valid and reliable the pattern will be.  
 
The process or pattern that needs to occur for a valid trading signal is price action should touch support for a bottom or resistance for a top and then trade away from that level for a period of time and then come back and test that same level again and respect it. The precise length of time or number of candles is debatable.  
 
In the example Daily chart below there are roughly 40 daily candles between the first and the second top.
 
A good rule of thumb regarding how to identify the two tops or bottoms is that price action when building the double top pattern forms a capital letter "M" as can be seen on the example chart below denoted by the black arrows. In a double bottom pattern we would be able to see the reverse or the capital letter "W". 
 
Lastly, a textbook double top pattern will take place at a new high on the chart while a textbook double bottom pattern will take place a new low.
 
chart 6 8 10
 

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