Thursday, February 9, 2012
Trend termination (TT): Double Top
The first pullback in a new trend is usually the deepest and the following pullbacks get shallower. As pullbacks get shallower, they attract fewer new buyers since profitability of buying a pullback is proportional to the depth.
Eventually, the pullbacks are so shallow (b52, b58) that they do not find buyers and early buyers will exit near the high. This will lead to a double top or double bottom and terminate the trend.
Since this is a termination and not a trend reversal, you would need to wait for a new trend to break out before entering a new trade or only trade fBOs.