The most important determiner of success with double top or double bottom formations is the swing size that the trader chooses for analysis.
The application of swing sizes that are too small will generate excessive commissions and slippage.
Increasing the swing size will dramatically reduce the number of trades. Although this might not be attractive for traders who want to see action, it improves the chances for profitable trades while limiting commissions and slippage. As a rule of thumb, there should not be more than 5 to 10 trades a year in a product like the S&P 500 Futures Index.
Figure 4.1 shows daily data for the DJ EuroStoxx 50 Futures Index between August 2001 and August 2002. The 13 turning points marked on the chart are based on a swing size of 300 points.
The appropriate swing size is closely related to the volatility of a product and has to be determined for each product separately. Computer simulations can do this easily on historical test data. The time span for the test results should be at least 3 to 5 years.
We consider the application of double top formations and double bottom formations to be a valid investment strategy. Its use demands discipline, however, since the investor must closely follow stop-loss rules, profit targets, or entry rules.
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