Double Tops, Volume & Reversals

Q. What is a Double Top and Double Bottom?


A: A double top refers to a situation where a market has rallied to the same or similar level a couple of times but fails to break through. Some technical analysts believe this is a sign that the market is running out of steam and represents a sell signal.

A double bottom refers to a situation where the market has dropped to a same or similar level a couple of times but does not fall any further, a pattern that many chartists regard as a buy signal.

Q. What is the Volume Indicator?

A: Volume refers to the number of shares being traded in a trading session - it can either be represented in thousands or tens of thousands. Be aware that some charts will display negative volume (i.e. volume that was actually sold to close positions) whereas other charting software will only show very limited information as they they only show positive volume within the charts. Volume is a good indication as to where the price is going. If you have rising volume which is positive in nature, then traders are pushing the stock and there are more investors buying in. But if the stock was negative and/or increased over each day of trading, then traders are not managing to push the stock and investors are exiting. This is especially so if it continues for an extended period of time.

Q. Are there any indicators which could help me trade price reversals?

A: If you are looking to trade on price reversals you could try using an oscillator to show oversold or overbought scenarios -:

An example would be using Bollinger Bands, RSI, or Stochastics.

Suppose you are looking for the price to reverse as it drops down near a key resistance point. You would use an oscillator and only enter the trade if the oscillator shows oversold.

For Bollinger Bands, this would mean the price is near the lower band.
For RSI, this would mean RSI is below 30.
For stochastics, this would mean stochastics is below 20.

Moreover, check to see if there are multiple levels of support between your entry point and stop, and check to see if the price can climb after entry without hitting much resistance.

Q. What would be the best indicators to use to catch the large market moves with strong trends?

A: Personally my favourites are moving averages; but you should also take a look at the breakout of significant highs/lows in the longer time frames.

Q. What indicators would you use to find out when market is just zig zagging and I should stay out of it?

A: You can use Welles Wilder's ADX as a filter for trending/sideways markets. Welles Wilder recommends to buy or sell markets which have an ADX higher than 25 and hold positions while it's above 20.

 ...Continues here - Using MACD and RSI with Daily Charts

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