Monday, April 17, 2006
Double Top/Bottom
When price peaks after a rise, and the decline that follows leads to another rise in prices to form a second peak at or about the level of the first peak, a double peak is said to have formed. A neckline can be drawn across the base of the two peaks. A neckline is simply a trendline and penetration through a neckline after a decline from the second peak is a good indication that the price of the tradable will continue to fall. Traders often allow for a 5% penetration through a neckline to avoid whipsaws. Volume is generally greater in generating the first top than in making the second.
A double top is simply two peaks. After the second peak is formed a breakout through the base is a signal of a possible reversal of the trend in prices. In the case of a double bottom, two troughs form and an expectation follows for the possibility of a trend reversal if the market price rises through the base.
Waiting for confirmation is important for trading double tops. Twin peak formations usually show a decline of between 10% and 20% between the peaks. Volume is usually higher on the left peak than on the right peak. The confirmation point is the base of the peaks. A breakout through the baseline is more convincing if accompanied by higher volume and predicts a continuation of the trend in that direction. Price projections can be made by determining the price difference from the neckline to the first peak and then subtracting that value from the price at the time of penetration from the neckline.
Price projections are estimates of the potential near term movement of the price once a breakout has occurred. When the price of the tradable is low, the best approach in making price projections is to use percentages. A percentage difference of 6% between the price at the first peak and neckline would translate into a projected price drop upon penetration of the neckline of about 6% of the price at penetration.
http://www.trade10.com/Double_Top.html
A double top is simply two peaks. After the second peak is formed a breakout through the base is a signal of a possible reversal of the trend in prices. In the case of a double bottom, two troughs form and an expectation follows for the possibility of a trend reversal if the market price rises through the base.
Waiting for confirmation is important for trading double tops. Twin peak formations usually show a decline of between 10% and 20% between the peaks. Volume is usually higher on the left peak than on the right peak. The confirmation point is the base of the peaks. A breakout through the baseline is more convincing if accompanied by higher volume and predicts a continuation of the trend in that direction. Price projections can be made by determining the price difference from the neckline to the first peak and then subtracting that value from the price at the time of penetration from the neckline.
Price projections are estimates of the potential near term movement of the price once a breakout has occurred. When the price of the tradable is low, the best approach in making price projections is to use percentages. A percentage difference of 6% between the price at the first peak and neckline would translate into a projected price drop upon penetration of the neckline of about 6% of the price at penetration.
http://www.trade10.com/Double_Top.html
# posted by Cherie : 1:48 PM
