Historical Simulator Plug-in
Okay, in this example I want to take you through some reversal patterns. We're going to look at head and shoulders, double tops, triple tops, and bottoms, and some rounded tops and bottoms.
Reversal patterns are obviously just what they say, we want to see a trend reverse and go the other direction. Of course, in doing so we're looking for particular patterns that are reoccurring price patterns that can give us some kind of clue as to what the market is going to do when it does this retracement.
So, I just want to go through some of these charts, and I've pulled up some charts and I've identified some patterns, I want to walk through them with you. Just to show you and identify, and help us locate to know what some of these patterns are.
The first one I want to show you here, is we have a nice little double bottom. Now, a double bottom would be where a market comes down off of a trend, and then makes a retracement, stops, comes back down and then tests that same level. Then, continues on in the opposite direction. So, many people would call this a nice little 123 bottom formation. Of course, the number 1 point of a 123 pattern is an annual high or annual low. So, this would be a nice little 123 bottom formation. But also, because it's so close that would be a nice little double bottom. If you look over here, and you count this one, this would be considered a triple bottom. Because you see this market coming down and testing this area of support 3 times. 1, 2, 3, before it takes off and goes the opposite direction. So, this could be in a short run this little area here, would be a double bottom. Of course, if we add this peak to it here we have ourselves a triple bottom.
Let's go on to...let's see, let's go on to Corn. Now, a 123 pattern is a very controversial thing. You know, what is a 123 formation? There's a little rule out there that somebody made up, called the 10, 20, 50 rule. That means that you want the pattern to be within the first- let's talk about, this little top right here. You'll want your first number and then the second number before your number 2 point. It's supposed within 10 days, then your third one is supposed to be within 20 days, and it's supposed to be 50%, at least a 50% move of the distance between the 1 and the 2. So, back number 3's retracement shouldn't go back much further than at 50% or at least 50% of the move. That's the 10, 20, 50 rule. Problem with that is that it only works in some markets.
It's a nice little rule of thumb, keep it in mind, but know that it's not, it's not solid, it's not as rock solid as some people would like you to believe. I'll tell you why, this is how you can dispel the 10, 20, 50 rule. Look at the waves of the previous trend, okay? This market moves in days from one wave to the next 26 days there. Here's another wave from the top of that one to that one is 20 days. From the next to the top of that one to this one is 35 waves. So, nowhere does the 10, 20, 50 rule fit within the wave reversal. Then, if you go to the other side, we've got from this bottom to this bottom is 32 days, from this bottom to this bottom is 28 days. From this bottom to this bottom is 34 days. So, the 10, 20, 50 rule doesn't work in this particular market because market doesn't move in 10 day waves, it moves in between 20 and 30 day waves.
So, we would have to modify our 123 rule. 10, 20, 50 rule to be something like a 15, 30 rule or something. So, you just keep in mind that it's just a rule of thumb, it doesn't necessarily work in every market.
So, this right here would be our 123 pattern. Then, of course chartist will often times sell on a break below the number 2 point. Right across that number 2 point, notice we've got 1, 2, 3- 3 nice little hits, to give us a little triple bottom, right there across the bottom of that number 2. It retraces, gives us our 50% retracement level, which we are looking for, we are looking for it to come back about half; 50% of the distance between 1 and 2. Then, as it breaks down below the number 2 point, that would be our sell, that would be our sell signal right here. Okay? That's your 123 top formation. I want to show you an expanded view of that. What we really want to highlight here, is the head and shoulders. Now, the head and shoulders is basically the same thing as a 123 formation, but we have a left shoulder. So, we have the left shoulder, we have the neckline, we have the head. The next point of the neckline, and then we have the right shoulder. What that gives us, it gives us is what we call the neckline or the trigger point, okay? The trigger point gets us into the market on a break below the neckline, right there. So, that's your neckline, right across the bottom of those peaks. Left shoulder head, right shoulder and then we sell on a break below that point. So, that's your head and shoulders on this market.
Now, some people would come in here and try and tell you that this was your 123 formation, right here. But it's too short. It's too small of a pattern. This market is retracing we already know from 26 to 35 days to make a pattern reversal. So, you can't use a little 5 day pattern, to consider that as a 123 formation. Had you done so, you would have probably called that a 123 formation and you would have gotten burned. You would have lost money. So, you can't really use these little tiny patterns, right here as reversal patterns, because those are not the 123 formations that we're looking for. We're looking for the actual market to retrace.
In Corn, this market here, is moving in this size of waves. Now, if we go to Cocoa, Cocoa moves in different size waves. You want to make sure you grab your tool and you calculate your different waves. For each market, and then determine how wide a 123, or a head and shoulders formation should be.
Let's see if we can look at another bottom formation, let's look for Gold. Now, Gold, right in here is making not so much a single 1, 2, or 3 bottom pattern, but it's making more of an arc pattern. I've got that upside down. Let's bring that in just like this. See that rounded bottom? It's kind of a rounded bottom formation, over a period of about 3 or 4 months. Of course, it's not perfectly round, so we can move this, just like this to help us out. Then, we have kind of a rounded bottom formation, right here in Gold. So, that's how the rounded bottom tool here works. That's what we look for in markets. A chartist will generally buy on a break above the rounded top or the rounded bottom. So, right across here is where you consider the rounding starts. You'll notice this peak broke right up through it, in the middle, but right here would be your buy signal, on the break above, where the rounding started. Probably right, this would be a little bit more accurate right in there. This would be your buy signal.
So, a rounding of a bottom, you break, you buy on a break above the round of the other side. So, right across through there, and you've got a nice little point right in there. Giving us another indication and that's about where that point is. So, we have a nice round bottom and then buy, right there.
Of course, we wouldn't have made much, had this turned around and came back against us. But hopefully would have followed with our stop loss and maybe made a couple hundred dollars in this market.
Let's go on and look at Lean Hogs. Now, Lean Hogs notice this top formation here. This is more of a triple top formation, right in here. We even have a fourth one out here. But see how all of these markets come up and are testing this area of resistance. Come up and try to break through this little area and we have 2 or 3 hits off of right here. We come back up and we have 1 hit right here and a couple more closer to it. We come up with another couple hits right here, and even a couple broke through a little bit. Come back up, and a couple more break through here. Almost even gives us a little more angle on it. You know, just kind of like this. But that's a nice little triple top formation, in the lean hogs. You need to watch for those, because those are patterns giving you some kind of indication that the market can't make it pass that area of resistance.
So, it wants to go up, nope, can't make it, come back down. Try again, can't make it. Go back down, try again, one more time, can't make it. Okay, I'm tired of trying to go up there. I'm going to come crashing down.
Let's go to the Live Cattle. Now, the Live Cattle, this one is- don't- you know, a lot of people will discount tops when they're this far apart. Okay? They want to see them closer together. But don't discount the tops, when they're this far apart. Look at this, look at this nice top, all the way across here. 1, 2, 3, then here's 2 down here. Here's a nice double bottom, right here. Don't discount these bottoms, and these tops when they're that high.
See, and then this one breaks down into a nice little formation going right across the top- going 1, 2, 3, 4 times it hit that top. What that's trying to do, is it's trying to go up and break pass that area of resistance. If it can't do it, it comes down, and says okay, let's try again. Can't do it this time, comes down. Okay, let's try it again, okay, we're tired of that, we're just going to drop off. So, keep in mind that's what this market is trying to do. Just because they have a little bit further distance between them. Don't give up on them, okay?
We've got these triple tops, right here. It's quite a distance between them, it's not usually a pattern that we would trade off of that far. But keep in mind what it's doing, because it is trying to come up, it's trying to break through this area of resistance, and then down it goes, let's try that again. It goes up, hits, nope, can't break it, comes down again; rests, relaxes, then goes back up and tries one more time... it can't do it. So, you can see the market trying to break these areas of resistance then gets tried and drops back down.
So, just while we're standing, here, or just while we're looking at this chart, let me show you another nice little formation, you see right here. This is a nice little head and shoulders. We got a left, gives us the neckline. We got our head, the next neckline, which forms our trigger line, and our shoulder. So that's a nice little head and shoulders pattern right in there. The beginning of that chart.
Let's go into Pork Bellies. This is a wild market. Very thinly traded. Right here on the same Pork Bellies chart within two months of each other, we have a nice little double bottom. Okay? We have a nice little double top, right there. Again, that's the market coming down, saying can I go down any lower? No, let's go up. Oh, let's try to go down one more time. Nope, can't do it. Okay, let's keep on going up, then. Comes down, then we hit the top, we break this point? No, let's come back down, we break it again, we'll give it another shot...nope, can't quite make it. Okay, we'll come on down. So, watch for those double tops, and those triple bottoms, and triple tops, and rounded bottoms.
Let's look at one more S&P 500. Here's another nice little, nice little rounded top formation. Put that right into position, here. Of course, we can grab our little handle, so we can...give it a better accuracy to it. There we go, another nice little rounded top formation. Of course, we look for a, look for a sell signal right in, you know, where this where this comes together, right in here.
I don't often trade these. But you know, some people do, some people really like them. I know a couple of educators who really watch for them, and look for them closely. This would be a sell signal, on a break below, here. But there's a nice little rounded top in S&P 500.
Let's look at Wheat- Wheat, there's another nice little double bottom, right there. See anything else, in there? Come back to the top of this peak, what are we making up here? Boy, that's kind of a rough pattern, right there. If anything... I don't know if I would even call it that. It's probably the closest we're going to find, on that little top pattern right there. But you can see it even when it's not a top formation. Look at this, right here. See where the market comes by...eh, can we break that? No, comes back down, tries again. Nope, comes back down, tries again, comes back down, tries again, no, tries again, no! So, finally it comes in and says, can we break it? Yes, we broke it this time, then you notice when it breaks it, it continues up. So, watch these areas of support and resistance.
Now, watch this, how this comes out here. This is..look at that, clear over here, it's still noticing that- that's still an area of resistance for us. So, there's some head and shoulder reversals, some doubles, some triples, some rounded tops and bottoms.
Grab your charts, grab your tools, and go looking for them. See how you like them, see if you can use them as an opportunity to buy or sell. Also, help you predict market direction.