in this video I'm going to give you the complete guide to the double top and the double bottom
chart pattern I'm going to show you what they look like how to spot them and more
importantly what do they actually mean are they telling us we're going to get a trend
reversal or are they a sucker play designed to get your money while the trend continues
onwards my name is Mark from Tradinformed.com and I have been analyzing and back testing the
financial markets for years in this video I am looking at these classic chart patterns
the double top and the double bottom and answering the question that you need to
know are these patterns relevant for the modern Trader and I'm not just crunching the numbers I
want to understand what they mean now I'm doing my analysis today on six of the most popularly traded
ETFs in the world SPY the QQQ, IWM 6 key ETFs and it is very crucial to understand this that the
market you are testing and trading makes it big difference these patterns do not apply universally
to every single situation now stay tuned and I will explain more let's start with the double
bottom first of all you want to see something that looks a bit like this you want to see the
lows somewhere about the same price they're not going to be exactly the same price but pretty
close we're going to see a downtrend preceding it we're going to see some sort of a recovery
in the middle and then we want to see is a full reversal of the previous Trend in the next move
now for the double top we want to see a mirror image of the double bottom so we're looking at
the high prices we want to see similar level high prices we want to see a preceding upward Trend
we want to see a small attempted recovery and then we want to see the price Direction Change
on the screen you can see the Tradinformed backtest model that I've used in all the
analysis in this video as you can see this is in Excel you can use it to develop to optimize
and to back test your trading strategies and to get more winning trades now I'm going to explain
exactly how I've used it in this analysis you can see here the example of the QQQ here I've
not used the profit Target or a stop loss but when you come to understand each of these patterns in
more depth you can very easily do that and you can see the results adjust in real time
now the only thing that I have used in this analysis is I've used a time
close and that has been consistent over every scenario I'm closing after 20 bars
now to get into the detail because the devil is in the detail what one person sees on a chart
pattern is what is different to what another person sees now the preceding trend this is
identified by a series of highs for a double top and lows for a double bottom this identifies the
preceding Trend now the maximum deviation this is how horizontal the double bottom or the double top
is there's always going to be a small amount of deviation however to get the classic pattern we
want this to be as low as possible but we need to understand how the where where the variability is
now the way I have compared these two crucial variables is in an Optimizer Matrix
you can see here I've measured the preceding trend against the maximum deviation and this makes a big
difference in the results if you're the sort of person who wants to understand more about the
analysis I am doing in this video about technical indicators about chart patterns on the screen you
can see my 21 more indicators spreadsheet which has the double top double bottom and a whole host
of other technical indicator formulas all easy to use with explanations and in Excel
you can get it in my Teespring store underneath this video on YouTube at Tradinformed.com and
in Amazon in the Amazon Kindle Store as I said earlier I have crunched the numbers so you don't
have to in my Optimizer Matrix I have compared the strength of the preceding Trend against the
horizontal variability I have also tested long only compared with long short for both the double
top and the double bottom for each of the six markets and finally I've compared each market in
their traditional form as a trend reversal pattern with trading the exact opposite so treating each
pattern as a trend continuation going long on a double top and going short on a double bottom
let's have a look at the detail of my results first and foremost my biggest finding was
that there the inverse pattern in other words treating the double top as a long entry signal
and the double bottom as a short entry signal outperformed in each market it outperformed
the standard interpretation outperformed using considering them as a reversal trade and that was
consistent across all of these markets secondly long only which you can see here in the tables on
the left and long short performed similarly in all scenarios and considering the upward drift of all
of these markets over the past 20 something years included in the analysis is of decent result for
short trade so I would take that as a good sign finally there is quite a lot of variation between
each of these markets so you see spy here you can see the heat map centered around 0.3 percent
horizontal variability at around about 30 days of trend significance but it's quite different
to the QQQ to XLK IWM and GLD going down here so each of these markets together we don't have
a huge amount of significance taken together you would have to take a lot of these trades
to start to get the significance and start to get the robot reliability of this trade entry system
double tops and double bottoms are classic chart patterns they are part of this compendium of price
action analysis that has been passed down from generation to generation from Trader to Trader for
years and years and every Trader should be able to spot these patterns and should be able to see
them in the charts see when they've happened and see when they may happen they're based on sound
trading science they're based on this idea of support and resistance which we know is
in there we know for all sorts of emotional for historical and Technical reasons prices
tend to find support around certain levels and they see resistance and certain other levels
the issue that I have with double tops and double bottoms which has been shown in the analysis that
I've done today which I've demonstrated in this video is that they are Trend reversal
patterns and you've got to be using the right patterns in the right market and at the right
time through all of these six markets that I've analyzed six of the most popularly traded
ETFs all of them have tended to trend upwards throughout this time period and
we cannot forget that that is a crucial part of this analysis and what this is telling me
is the double top has failed much more often than the double bottom has been successful
and the importance of this is the double top failing is a continuation pattern so that when
we're in a strong Trend this trend is more likely to continue than it is to reverse and this is a
thing we all want to know when the trend is going to reverse we all want to be early on a trend it's
great to be early on a trend but it is easier to look at this analysis it is easier to spot
when a trend is going to continue and these have been the most successful trades over all of these
six widely traded markets over 20 plus years of analysis now I hope you enjoyed this video I had
the analysis made sense to you I hope you found it useful and I hope it's going to be beneficial
in your trading going forward now if you like this video please hit the like button if you want
more content like this please subscribe to this Channel and for more information about trading
the financial markets about back testing your trading strategies please go to tradinformed.com
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