[B]Student’s Question:[/B]
Hi Powercourse Instructor,
I read your prev. comments on Bottom/Top formation. I would like to know how many candlesticks should be between both legs to qualify them.
thanks
[B]Power Course Instructor’s Response:[/B]
The interpretation of candlestick charts has often been referred to as being more of an art than a science. As such, there is not a hard and fast number of candlesticks that need to occur between the two legs. More is better than less and two candles right next to each other touching the same support/resistance level would not qualify.
The process/pattern that needs to occur for a valid double top/bottom is price action needs to touch support for a bottom or resistance for a top, trade away from that level for a time and then come back and test that level again and respect it. Ideally, a longer period of time between the two levels would lend more validity than a shorter period of time. The precise length of time or number of candles is open to conjecture and will vary a bit from one trader to the next.
Take a look at the example Daily chart below…
Note how the double top pattern forms a capital letter “M”. In a double bottom pattern we would be able to see a capital letter “W”.
Also, a textbook double top pattern will take place at a new high while a textbook double bottom will take place a new low.
Hope that helps…