RESEARCH PAPER: FUTURES TRADING

TITLE:

EXAMINE THE EFFECT OF DOUBLE TOP PATTERN IN TECHNICAL

ANALYSIS.

SUBMITTED BY:

OLUWAJOBI, JOHN.O

APRIL, 2015

INTRODUCTION

What is the technical analysis? Technical analysis is a method of analyzing securities through

past market activity, such as volume and price to predict future prices.

Technical analysts use charts and other tools to identify patterns that can predict future activity.

They also use supply and demand in the market to know the trend and direction of prices. Thus,

technical analysis tries to understand the emotions in the market by studying the market itself,

but not its components.

Furthermore, technical analysts majorly use historical price and volume data to study market and

that is what separate them distinctly from the fundamental analysts. One of the most important

tools of a technical analyst is a security’s historical trading and information data. This data can

predict future movement of such securities. The value of a stock really matters less to a technical

analyst. There are three fundamental principles of technical analysis on which their assumptions

are based;

1. The market discounts everything

2. Price moves in trends and trends persist

3. Market action is repetitive

1. The market discounts everything: Technical analysis assumes that the real price or value of a

stock or share, at a given time, reflects everything that has or could affect the particular

company. Price movement is the reflection of change in supply and demand.

2. Price moves in trends and trends persist: Technical analysis believes that price movements

follow trends, that is, after a trend has been formed, the future price movement is more likely to

move in the same direction as the trend rather than against the trend.

3. Market actions are repetitive: Another important assumption in technical analysis is that the

market actions are repetitive. This means that particular patterns appear as market participants

tend to provide a consistent reaction to similar market situation or circumstance.

METHODOLOGY

The double to pattern usually occur on the bar chart, candlestick chart and line charts. This

pattern is made up of two consecutive peaks that are roughly equal and has support line. At the

end of this pattern, the trend is considered to be reversed and security is expected to move lower.

A double top look like letter M. It forms when price rise to a certain level, and turn down, then

rise again to the near previous height, and then move down a second time below the valley

between the two heights. This pattern is completed when the security fall below the support level

or neckline that has stopped each move the security made, thus making the beginning of down

trend.It is essential to note that the price does not touch the level of resistance but it should be

very close to the prior height .One should wait for price to break below the neckline before

entering. Trading before the signal is formed can lead to huge loss, as the pattern is only setting

up the possibility for the trend reversal and could trade within this sideways movement for some

time without falling.

In this pattern, volume on the rise to the second peak is less than on the first peak. If volume is

relatively higher, chances of double top occurring are reduced. Double top pattern do not occur

frequently and when you see the type of this pattern expect price to move in a direction of

reversal at least the distance from the valley to the peak.

In this paper in order to understand technical analysis in depth we choose double top chart

pattern for study. The occurrence of this pattern for past years from 1984-2014 for corn

commodity for May and December contract and making the decision to go for long/short

position. The pattern was gathered from admis.com website.

RESULTS AND INTERPRETATIONS

Below are the double top patterns of Corn (ZC)collected from www.admis.com site from 1984-

2014 results and chart interpretation

Interpretation of the chart .1

From the chart above, the two peaks were formed between months of April and May 1985 at

price $283.50, these two peaks formed a double top and created a good resistant level. We drew

a neckline at price $278.50, so the peak distance to the neckline is 5 (that is our price target) so at

the break point where the neckline break we can take a short position and earn a profit of $250

with one contract.

Interpretation of chart:2

In the above chart we identified two peaks between December and February,1986 at price

254.50.These formed a double top and we can drew a neckline at price 250 so peak distance is

4.5 , from the peak to the neckline and from that point if we go short and earn a profit $225.

Interpretation of the chart:3

From the chart above the two peaks was identified between months of May and July, 1987 at

price 202.50, these two peaks formed a double top created a good resistant level. We drew a

neckline at price 185.00, so the peak distance is to the neckline is 17.5 ( that is our price target)

so at the break point where the neckline break we can take a short position and earn a profit of

$875 for one contract.

Interpretation of chart:4

From the chart above the two peaks was identified between months of March and May, 1991 at

price 258.00, these two peaks formed a double top created a good resistant level. We drew a

neckline at price 250.00, so the peak distance is to the neckline is 8 ( that is our price target) so

at the break point where the neckline break we can take a short position and earn a profit of

$400 for one contract.

Interpretation of chart:5

From the chart above the two peaks was identified between months of February and April, 1992

at price 279.50, these two peaks formed a double top created a good resistant level. We drew a

neckline at price 268.00, so the peak distance is to the neckline is 11.5 (that is our price target) so

at the break point where the neckline break we can take a short position and earn a profit of $575

for one contract.

Interpretation of chart:6

From the chart above the two peaks was identified between months of August and October, 1997

at price 358.00, these two peaks formed a double top created a good resistant level. We drew a

neckline at price 340.00, so the peak distance is to the neckline is 18 ( that is our price target) so

at the break point where the neckline break we can take a short position and earn a profit of

$900 for one contract.

Interpretation of chart:7

From the chart above the two peaks was identified between months of November and February,

2001 at price 235.00, these two peaks formed a double top created a good resistant level. We

drew a neckline at price 225.00, so the peak distance is to the neckline is 10 ( that is our price

target) so at the break point where the neckline break we can take a short position and earn a

profit of $500 for one contract.

Interpretation of chart:8

In the above chart we identified two peaks between August and October,2002 at price

287.50.These formed a double top and we can drew a neckline at price 261.00 so peak distance is

26.5 , from the peak to the neckline and from that point if we go short and earn a profit $1325

for a contract.

Interpretation of chart:9

From the chart above the two peaks was identified between months of May and July, 2004 at

price 330.00, these two peaks formed a double top created a good resistant level. We drew a

neckline at price 280.00, so the peak distance is to the neckline is 50 ( that is our price target) so

at the break point where the neckline break we can take a short position and earn a profit of

$2500 for one contract.

Interpretation of chart:10

In the above chart we identified two peaks between November and February,2010 at price

435.00.These formed a double top and we can drew a neckline at price 390.00 so peak distance is

45 , from the peak to the neckline and from that point if we go short and earn a profit $2250 for

one contract.

Interpretation of chart: 11

From the chart above the two peaks was identified between months of January and March, 2013

at price 729.00, these two peaks formed a double top created a good resistant level. We drew a

neckline at price 710.00, so the peak distance is to the neckline is 19 ( that is our price target) so

at the break point where the neckline break we can take a short position and earn a profit of

$950 for one contract.

We use the table below to record our average profit over using double top pattern over the period

of 11 years.

Year Peak distance

(Maximum-

minimum)

Price Movement

(Peak

distance*50)

Average Profit Profit

1985 283.50-278.50=5 5*50 250

1986 254.50-250=4.5 4.5*50 225

1987 202.50-185=17.5 17.5*50 875

1991 258-250=8 8*50 400

1992 279.50-268=11.5 11*50 575

1993 358-340=18 18*50 900

2001 235-225=10 10*50 500

2002 287.50-261=26.5 26.5*50 1325

2004 330-280=50 50*50 2500

2010 435-390=45 45*50 2250

2014 729-710=19 19*50 950

977.273

Total Profit=$ 10,750

Average Profit=$977.273

CONCLUSION

For 30 years, we observe strong double top pattern for corn commodity traded in March, May,

July, September and December contracts. In 11 years we are able to find trades using double top

pattern as an indicator and this pattern made a positive difference in the market movement by

making the profit in 11 years.

From the findings, the double top pattern is very rare over the year 1984 to 2014.However, it

was very effective when we used it in this research over the years (1984-2014).By using this

indicator we were able to get a profit of about $977.273 with just one contract per trade.

Therefore, if this pattern is used carefully the profit is sure.

REFERENCES

Futures prices: http://www.admis.com/quotes-charts-news

http://www.trending123.com/patterns/double_top.html

Langager C and Murphy C. Analyzing Chart Patterns: Double Top and Double

Bottom.http://www.investopedia.com/university/charts/charts4.asp

The Technical analysis Course by Thomas A.Meyers. 40 pages.2003.McGraw-Hill.New York.

Double and Triple Tops Bottoms.3Ed.