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DOUBLE TOPS


Trading the Failure of Technical Patterns: Double Top

05/09/19 04:30:48 PM
by Fawad Razaqzada

All is not lost when a reversal chart pattern like a double top fails to materialize.

Security:   N/A
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When technical patterns fail to work like they should, it can become very frustrating. But rather than getting upset about it, traders can take advantage of the situation by trading the failure of these technical formations, especially the failure of reversal patterns such as double tops, head and shoulders and trend breaks.

Once it becomes apparent that, say, a bearish reversal pattern like a double top or a head and shoulders pattern has failed, the most important point to remember is that you now have an idea where the market should be going to: i.e. where the sellers' stops would be resting. With the objective clear and stop loss location easy to identify, you don't need to worry too much about getting your perfect entry.

One of my favorites is the failure of double or triple top reversal pattern. These formations occur all the time and not all of them work as the textbook suggests. Indeed, double tops usually prove to be typical traps for the bears, making them ideal patterns to fade. To illustrate my point, take a look at this example of a clear double top pattern on the daily chart of the S&P 500 E-mini Futures (Figure 1) that took place in early March. The index made a double top around 2815 and the reversal pattern was confirmed a few days later upon the break of the bullish trend line and then a daily close below support around the 2764-71 area. However, despite this apparent bearish reversal, there was no desire from the bears to push the market lower. If the trend had truly turned bearish, the broken support area around 2764-71 should have turned into resistance upon the re-test, which took place a few days later. However, this wasn't the case. Instead, the index closed back above it and the support area was reclaimed again by the bulls.

Figure 1. S&P 500 E-mini Futures daily chart, showing an example of a double top failure
Graphic provided by: TradingView.com.
 
So, one way the bulls could have taken advantage of what turned out to be a false breakdown, would have been to go long on the day after the broken support area was reclaimed, with the target being some distance above the double top high (where the bears' stop loss orders would have been resting and providing liquidity) and the stop loss being below the thrust candle that led to the move back above the broken support. Alternatively, the bulls could have bought future dips back into the double top high after the index broke above it.

The entry is not the point. What I am trying to get at is that this whole trade idea was based off the bearish signal that failed to work, and how this in turn could have been used by traders to look for bullish entries. Essentially it is thinking outside the box and taking advantage of a shift in momentum in the opposite direction. Being aware of how to trade pattern failures may help you quickly recover your costs should one of your trades happen to be based on a classical technical pattern that has failed. By flipping your position quickly in this situation, not only are you reducing your cost, but can potentially make a profit. In a nutshell, trading the failure of technical patterns is an edge in itself, and potentially a rewarding one too given that fast moves often come from false moves in the opposite direction.



Fawad Razaqzada

Fawad Razaqzada is an experienced analyst and economist having been involved in the financial markets since 2010 working for leading global FX and CFD brokerages. Having graduated with a degree in economics and leveraging years of financial market experience, Fawad provides retail and professional traders worldwide with succinct fundamental & technical analysis. In addition, he also offers premium trade signals to subscribers, and trading education to help shorten the learning curves of developing traders. He has also been trading on his personal account for many years. Follow Fawad on twitter @Trader_F_R or visit his website at TradingCandles.com.

Title: Financial Market Analyst
Company: TradingCandles.com
London,
Website: tradingcandles.com
E-mail address: fawad.razaqzada@hotmail.co.uk

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