We have been lucky enough to have a lot of chart setups to keep us amused over the last few weeks but Ric and I are always working to bring you more – I for one am working on some new candlestick setups for you to think about in the next few weeks. In this setup I am heading back to one of my perennial favourite patterns – the W reversal.
For this setup the main indicator that you need to use is the Bollinger Bands – the Bollinger Bands consist of a moving average (20 periods in this case) and bands made up of +/- 2 standard deviations. The idea being in this case that a breach in price outside of the bands represents a significant spike in the level of volatility.
This setup uses this idea but is not complete until a second trough has been formed – this time inside the bands – the rationale is that this is demonstrating a reduction in the level of volatility and the potential for a reversal to occur.
For this pattern to have properly formed up the trader will typically wait for a trough to form and then place their stop under the base of the trough. There isn’t a specific target on this type of trade so traders would generally trail their stop either under subsequent troughs as they form up or potentially use an x bar trailing stop.
I have also drawn a horizontal support line in which if prices continue to fall may form up as a double-bottom. I will keep an eye on this and examine it if it occurs.
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Always like getting questions and comments so feel free to send them through.
All the best,