Double and Triple Top

This is such a simple set up�simple but effective. You are bearish
USDCAD because the pair has just rallied relentlessly, you think oil
is going higher for various fundamental reasons, and you think the
Bank of Canada is worried about currency weakness. USDCAD has
just rallied to the topside 100-hour deviation and the chart looks
like Figure 7.10.
The pair is bumping against a major round number resistance
(1.4000) and has failed three or four times now. It is a triple or
quadruple top. You also remember that USDCAD has rarely sustained
moves above 1.4000 in the past (other than around the internet/
tech bubble), as you can see in Figure 7.11.
So the beauty of this setup is that you can sell with leverage
because you are only risking a little. You simply sell near the double
or triple top with a stop above. Here I would sell at the multiple
tops (1.3980) and put a stop loss on the other side (at 1.4017).
My stop is far enough away to withstand a minor breach of
1.4000 but not much more. By trading such a tight entry/stop loss,
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Figure 7.8 Daily AUDUSD with triangle breakout, November 2010 to March 2011.
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Figure 7.9 Daily AUDUSD with failed triangle reversal, December 2010 to May 2011.
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Figure 7.10 Hourly USDCAD, December 11 to December 21, 2015.
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Figure 7.11 Daily USDCAD with dotcom bubble marked 1971 to 2014; USDCAD has trouble
staying above 1.40 (other than during the tech
bubble).
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I can take a big position. That is the best thing about trading near
simple support and resistance levels�you can leverage your position
aggressively because you are not risking much in percentage
terms. In this example, if you catch the turn, you will find yourself
with the opportunity to make 100 or 150 pips on a trade where
you were only risking 37 pips.
� 7. Sunday Gaps
The Sunday Gap pattern is one of the most reliable patterns
in foreign exchange but also one of the most difficult to trade.
The pattern arises when there is major news out over the weekend
and the market reopens at a new level on Sunday. There are dozens
of examples in the past 20 years, including the weekend Saddam
Hussein was captured (bullish USD), the weekend Greece voted
against the IMF bailout (bearish EUR), and the weekend Recep
Erdogan declared that financial markets were at war with Turkey
(bearish TRY).
The stunning feature of Sunday Gaps is that they almost always
fully reverse within 48 hours. In 2012 I did a study of 20 different
Sunday Gaps and found 85% of them reverse to the prior Friday
close within two days. This happens because the market gets overextended
and out of balance as it attempts to find a new equilibrium
in a thin market where there are only buyers or sellers (depending
on the news) and nobody to take the other side. This huge opening
order imbalance makes the market move much more than it would
have otherwise and this overextension then corrects substantially as
liquidity returns to normal in the Asia session.
Example 1: Greek Referendum 2015
In July 2015, Greek voters went to the polls to vote on whether
to accept bailout conditions imposed by the European Commission,
IMF, and ECB. The vote was a resounding no (61% to 39%) and
this was viewed as a negative outcome for the European Union and
EUR. Figure 7.12 shows what EURUSD did on the Sunday open.
This is a classic Sunday Gap. The market closed at 1.1084 on
Friday and then gapped much lower to open at 1.0980 on Sunday
(see the gray area in the middle of the chart). EURUSD probed
the downside one more time (1.0970 is the low) and then rallied
all the way back to the Friday close of 1.1084; this happened even
though the news was unambiguously bad. Let�s look at anothermore
recent example. Note that I could fill 25 pages with examples like
these�it�s a common and powerful pattern