In this third part of the trading strategy series with technical analysis of chartist patterns. This time we will be talking about the famous double formations, known as double roof and double floor, as the case may be.
What is a double roof / floor?
It is a type of chartist pattern of trend change, form after the price rejects twice the same area or price level. There are two particular cases:
In the case of upward trends, the impossibility of overcoming resistance on 2 consecutive occasions is known as double roof.
When the price is in a downtrend, 2 minimums on the same area or level, it is known as double floor or floor.
In the middle of the formation is a structural point, it is used to determine the neck line of said chartist pattern.
Below is a graphic representation of a double roof to better understand the formation.
It provides high reliability and is often repeated frequently in price charts, so it is widely used by technical analysts in financial markets. It is worth noting that the example image is just a reference.
This is clarifying because the market may not occur exactly on the same level, nor does the validation pullback.
The sale or purchase signal that is thrown can be used in any type of market, both stock exchange, Forex, indices, cryptocurrencies, futures, raw materials, etc.
Objective of double ceiling / floor chart patterns
The double formations, like the great majority of the chartist patterns, project an objective where the movement after a break is minimal, equivalent to the size of the figure.
When the pattern initiates a strong trend change, the predetermined target is generally exceeded.
Different tools used in technical analysis, such as Fibonacci retracements or supply and demand zones. They can be used to determine higher profit rates.
How to operate a double roof / floor?
The constant dynamism of financial markets leads to traders constantly adapting to it; causing that there are innumerable ways to make an entry according to reading a specific chartist pattern.
Today we review only the 2 most common and simple ways to take advantage of a double training:
1. Entry into the 2nd touch of the resistance
Generally the operator has already analyzed a broad panorama of the situation, managing to identify a possible area for the beginning of a trend change. This way you are prepared to wait for a chartist formation that supports your vision.
In case of an upward trend, the price has been making a series of increasingly high highs. However, when it reaches the expected area, the price fails to continue the previous feeling, thus generating a double ceiling, demonstrating the weakness of buyers.
It is the signal that the technical analyst expected, which leads him to take a position to try to anticipate a future movement.
Traders who make this type of tickets observe the following:
- Japanese candles: For the search for vendor control.
- Indicators: Attempted to identify some divergence that demonstrates weakness. For example, a decrease in volume in the 2nd stop, or a downward inclination between both peaks observed in the RSI while the candlestick chart is ascending.
- False resistance / support breaks
- Correlation of temporalities: They observe graphics from the largest to the smallest time frames to optimize the input, and take advantage of most of the movement.
There is the riskiest way to operate a double roof or floor, because the trader tries to take advantage of a trend that has not yet begun.
Until the neckline is not broken, the trend remains intact, so there is a good chance that the price will fall somewhat due to momentary weakness, but the force majeure will resume quickly.
As here we are mainly dedicated to analyzing cryptocurrencies, let’s go to an example of a double roof in Bitcoin.
As you can see, the downward trend that Bitcoin experienced during the last months of 2019 could take advantage after observing a very clean double ceiling on the resistance at USD 11,500.
Also, as the neckline was respected a second time, it demonstrated the strength of the previous trend.
Subsequently, when observing an effective break of the support, the objective that indicates the formation, located in USD 7,700, was highly efficient, reaching in the first impulse.
Chartist figures are more efficient the longer the time frame is identified. In this case, the training is observed in the weekly temporality, so its prediction has high reliability.
2. Neckline break
It is the ideal form, and indicated by the theory, because that is when the trend changes.
In the bullish case, the price goes from making higher and higher highs, to finding lower and lower minimums.
The 2nd touch of resistance, and rejection of it, indicates the weakness of buyers. When a break in the neckline of the formation occurs, the change in trend is confirmed.
A break in the neckline can be operated in 2 different ways, and they are as follows
Break and recoil
The first form is done after a break and pullback over the neck line or area. Broken supports and resistances are generally tested before the price continues its course. It is the least risky way to operate a double training.
Using the example of the weekly double roof in Bitcoin, the pullback was made after the target was reached immediately after the neck line was broken.
The stop loss for this case can be positioned above the maximum made by the reversal. However, it could vary depending on the correlation of temporalities used by the trader.
As the initial prediction had already been reached, the investor could try to find a second profit taking below the previous minimum.
The second form of entry is made as soon as an effective break of the neck line is observed. Traders use this form of entry because in some cases the price continues quickly, without performing a test of the broken area.
In the case of the real double roof analyzed in this article, the candle of a break reached the objective of the formation, so waiting for the closing of the candle would not have been profitable.
The investor who tried to take advantage of the movement with this type of entry, needed to correlate temporalities, to enter the market observing minor time frames.
Where can I trade?
It is necessary that you put into practice the knowledge learned as soon as possible, only the experience will lead you to refine your eyes to read the patterns that are repeated in the markets, profitability will come.
Demo accounts are excellent tools to test trading strategies, particularly complex ones as chartist patterns. Of course, use it very seriously, thinking as if it were real money that you are operating.
Brokers like Plus500 offers demo accounts with the same characteristics as a real account. In this way we can confirm that the company offers a responsible and quality service.
The sooner you make a transition to a real accountWell, that’s where you’ll start dealing with the important psychology of the investor. Start with money that you can afford to lose, as you will make decisions governed by a pre-established plan, and not by passing emotions.
No matter that it is little money, the important thing is that you manage the risk so as not to go bankrupt. The experience will be what catapult to success.
I hope this publication has been to your liking. Any suggestions or opinions you can leave in the comments, we will be happy to read you.