TECHNICAL ANALYSIS

Don Dawson

A View From
The Top And The
Bottom

T
Don Dawson shows how to use the double top and he patterns I am refer-

double bottom chart pattern in trading. He also
describes how to include Bollinger Band analysis to
enhance the trading opportunity.
8
ring to are the classic
Double-Top and Dou-
ble-Bottom chart patterns. I use
the word “classic” to give you an
introduction as to how these pat-
terns started.
 TECHNICAL ANALYSIS
Figure 1
When I started trading futures, the luxury of desktop
computers was still a dream. Traders either subscribed
to a service that ‘snail’ mailed printed charts to you or
used scotch tape to put sheets of graph paper togeth-
er for an extended chart view. Then, we would tape
them to our office walls creating a huge mural of bar
or point and figure charts. Either method you elect-
ed, at the end of the day, you used a pencil and ruler
to manually draw the open, high, low and close for
each market that you followed. Fortunately, we just
updated the daily price bars and not intra-day bars.
Most people would just get their data from the news-
10 APRIL 2009 / VOL. 5 ISSUE 4
paper the next day. At this time, chart users were still
considered a little ‘out there’ because technical analysis
was not very popular. Most people still relied heavily
on fundamental analysis to trade.
By using only a pencil and ruler, we had a limited
number of chart patterns we could locate and base our
trading decisions on. This is unlike today where soft-
ware programs like TradeStation® have literally hun-
dreds of different technical indicators that generate
buy and sell signals for traders. Chart patterns like
double-tops/bottoms, head & shoulders, flags, pen-
 TECHNICAL ANALYSIS

Figure 2

nants, etc. had such a following that some people felt
that the popularity caused the patterns not to be as
profitable. Today, I believe some of these classic pat-
terns are returning to favor. With so many different
ways to trade, we do not seem to have the herd instinct
when these patterns develop.
mitted. When you read some of the names of these
patterns you will get a chuckle. For example – scal-
lops, pipe tops, long island, bump & run.
His work on the double-top formation is very surpris-
ing. The overall performance of this pattern ranks a ‘2’
out of ‘21’ (‘1’ is best). It shows that after the neckline

While teaching the e-mini futures class, I bring up
these patterns. The usual response is, “That’s nice, what
else do you have?” Then, I show them a website by
Thomas Bulkowski, author of several books including
Encyclopedia of Chart Patterns. He has back-tested
all of the classic and new patterns that have been sub-
is broken, 59% of the time the market will pull back
to the neckline. Here is the astonishing point – price
meets its profit objective 73% of the time. How many
trading systems can boast that statistic?
Before I show you a method to possibly enhance the
already high percentage of success, I would like to add

12 APRIL 2009 / VOL. 5 ISSUE 4

a couple of added features to look for:
• When you find a double-top/bottom pattern, look
to the left of your chart and try to find some sup-
port/resistance levels that help confirm this pat-
tern.
• Remember, these are “reversal” patterns. Meaning,
you have to have an extended trend in place to re-
verse before they can be reliable. If the market is in
a trading range, then a reversal pattern will prob-
ably have little impact on price direction.
• If the trend has been going up and each previous
swing low is higher, then the first swing low break
will be the double-top pattern neckline. Adding
fuel to the downside, as people who were long will
also be taking profits under these lows.
In the charts below, I have added the Bollinger Band
indicator using the standard settings (20,2). Many
times a price trend will hug or trade just outside one
side of the Bollinger Bands until the market finds
some support or resistance creating point A (left side)
on the chart. Once this level is approached, you can
look for a pullback of the current trend. Then, anoth-
er attempt will be made in the direction of the trend
causing point B (right side) to be made. This is where
a divergence can appear.
On this attempt, the market may stop at the previ-
ous support or resistance level causing a double-top or
bottom pattern. To confirm the pattern, look for the
price to stay “inside” the Bollinger Bands on the retest
at point B (right side) on the chart. If the price stays
inside the Bollinger Bands while creating the double
top, you can enter the trade in one of two ways:
• Conservative – Wait for a bar to close under the
neckline.
• Aggressive – Once price touches or comes close to
the old high, look for your first “red” candle close
and go short.
Profit objectives for these patterns are as follows:
Take the peak at point A or B and subtract the neck-
line, point C. This gives you the height of the pattern.
Then, take that number and subtract it from the neck-
line, which will give your profit objective at point D.
Below is a chart of a double bottom pattern. Both
patterns work the same way using the Bollinger Bands.
The trade would be inverted for a buy setup instead of
a sell setup.
These two reversal patterns are very powerful. By add-
ing the Bollinger Bands, you can add even more suc-
cess to your trading. These setups can take a while
to form, but they are worth the wait. Before trad-
ing them, make sure you fully understand the setups.
Then, add the strategy to your written trading plan.
For those of you that do not trade them, you should at
least be aware of them while you are trading.
Keep the trend on your side,
Don Dawson, Online Trading Academy Commodity Futures
Instructor
APRIL 2009 / VOL. 5 ISSUE 4 13