Looking For Tops

No ! I am not expecting a Top! I just follow the trend till the bull says "I am tired and want a rest" .

I chose to write about this topic as the robust rise which has, as always,  taken most market participants by surprise, is keeping one wondering at every rise whether a Top has been made.

Protecting hard earned gains becomes an obsession  and more often than not a short period of weakness is often mistaken for the actual top, leading to selling their hard made investments much before the trend is over.

Tops  never happen in a day.It will tease before giving in thus making it a somewhat long process.  Keeping some simple rules and events in mind will help ride this wild bull.

• Stop looking for short term gains.You earn more peace of mind and money by looking at the larger picture.
• If after a move into new high  there are several days of  increased volume with either very poor price progress or actual declines then a top may have been made.These are called distribution days.
• Look for a close below an important trendline.Looking for a two period close below it would be sensible. Normally it should be the trendline joining the lows of the move that you are trading. If one is riding the current uptrend from August 2013 lows then we look for a close below the uptrendline drawn from that low.
• There is a red alert if a high is made, reaction sets in, desperate attempts are made to cross that high but instead the low made during the reaction is easily taken out instead. This is called a failed test of the previous high. This shows bears are  gaining strength.
•  Look for a close below the swing low established after either of the above --break of trendline or failure to test previous high-- event happens.This will be the final confirmation of a top having been made.
• During the  topping out process, the indentification gets  easier if topping technical patterns like the Outside Bar, Inside Bar,Rising wedges,Head and shoulders, and candle patterns like, Bullish engulfing,Evening star, Hanging man and Shooting star occur. 

There are several other methods but this is the basic and most reliable.Comments and any additions to the above are welcome.

 

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Happy Trading !!

Lakshmi Ramachandran
www.vipreetsafetrading.com