Tops and bottoms can be found in characteristic wave structure of the price in forex market. By looking at historical data, we can see that most of the tops would have been great entry areas for short positions within downtrend. Bottoms would be great entry for long positions within uptrend.
Tops (local highs) are areas in price movement, where price stops to rally and creates so cold U turn to opposite price direction.
Bottoms (local lows) are areas in price movement, where price stops to decline and creates so cold U turn to opposite price direction..
How to identify tops and bottoms in forex.
Using forex indicators to find tops and bottoms
We can profit in forex by using oscillators such as RSI (relative strength index), CCI (Commodity channel index), Stochastic, DeMarker and others. They all serve as a great tool for finding those tops and bottoms on forex market.
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To use them properly some testing needs to be done. We need to find out which forex indicator works best with our chosen currency pair. Also, on what timeframe and what period should we use. Generally, lower calculation periods are performing better in finding tops and bottoms within already identified trend.
Indicator settings with higher period, applied on higher timeframe can help us identify historical tops and bottoms or trend reversals. We look for indicator to reach overbought levels (upper line) to identify tops, and to reach oversold levels (bottom line) to identify bottoms.
Candle formations as tool for finding tops and bottoms
Candle formations are underestimated tools of position timing. In typical wave structure of forex market, end of the correction is a great place for us to enter our trade within the trend. However, excellent timing is necessary to reap benefits from entry on correction.
Stop loss of badly timed trade can be triggered, even if the position is fundamentally correct. Candle formation can help us to identify exhaustion of pullback and enter just before its reversal.
To identify massive tops and bottoms created by the trend reversal, switching from candle formations to chart formations can be recommended. By looking for reversal formations at the top / bottom of the trend we can properly time our entry and take advantage of the whole new born trend.
Using Bollinger bands forex indicator to find tops and bottoms in volatile market
BB can work extremely well with top/bottom identification especially in ranging market. This forex indicators takes volatility into account when calculating its top and bottom line, therefore it is able to adapt to market conditions.
Again, as with oscillator back testing is required. Connecting BB with other indicator such as MACD, Alligator or ADX can be recommended to filter out some insufficient quality signal. We look for price to pierce through upper Bollinger band and return back underneath it for identification of tops. We look equivalent action at the bottom of BB for buy orders. With this forex indicator we pick tops and bottoms to enter, only in direction of general trend.
Using trendlines to find tops and bottoms
After finding and being able to draw trendline on either supports (bottoms) or ressitances (tops) we can expect that price will again create top/bottom when reaching this trendline (we can expect price to bounce once more).
Bouncing becomes more likely if trend has reached new high price in uptrend, or new low in downtrend (since the previous bounce of trendline). It is also usefull to consider volumes forex indicator. Bounce becomes more likely if the price approaches trendline on low to average volume.
Fractals forex indicator is a great tool for visualisation of tops and bottoms.
Bearish Fractals (local tops) can be found between four candles. Two on the left, two on the right. Each of them has its high lower than the high of middle candle – our top. Tops can be considered to be a local resistance in price movement, especially if they surpassed previous price high.
Bullish Fractals (local minimum) can be found between four candles. Two on the left, two on the right. Each of them has its high lower than the high of middle candle – our top. Tops can be considered to be a local resistance in price movement, especially if they surpassed previous price high.
How to use tops and bottoms marked by fractals, for our entry
We can use historical tops (resistances) and bottoms (supports) to place pending order either in direction of breakout (in trend), or against it in ranging market.
Contrarian approach can be also applied in low volatility market. Fractal down (bullish) would then mark entry short. As we expect price to be more likely to reverse immediately as the second candle (fractal signal candle on right) closes. And vice versa for fractal up (bearish).