Despite a couple of big selling sessions this month the German 30 CFD, like the Australia 200 has clung on without breaking major support.
However, yesterday’s big reversal candle leaves what might be a double top. This could make the next couple of trading sessions interesting.
This double top comes at what could be the end of a 5 swing advance. With price well above the 200 day moving average there’s scope for a decent sized downward correction if the support does get broken.
This situation is very similar to the oil set up, I posted on 18 February. The stop loss and entry and stop loss strategies on this chart follow the same logic, I outlined in the oil post. I won’t repeat them here but you can easily get details by clicking on the link.
The strategy of waiting for price to break under the low between the 2 double tops is supported by research. Thomas Bulkowski published exhaustive research on stock market pattern performance in his book “Encylopedia of Chart Patterns”. Here he noted that in bull markets, prices will actually rise 65% of the time and not drop through the confirmation line following a double top. The higher probability of trend reversal only comes into play once the confirmation line is breached. Even so early entry can sometimes be effective with tall patterns and good divergence but that’s a story for another day.
Another common technique with this type of strategy is top apply a price filter, waiting for price to move well below the trigger line before entering and above the resistance before stopping out.
Depending on the filter you apply, an order ticket for this strategy, using a boundary on the stop entry might look something like this
If there is a setup, I’ll post a follow up discussing approaches to profit objective and trailing stop losses.