Yesterday, a trader asked me about his experience. He mentioned that he had been quite successful with long positions in gold, starting from around 2370 and making a significant profit. However, he did not close his positions in time. The market fell from 2480, and gold dropped nearly $80 on Thursday and Friday. He felt very frustrated, wondering why he didn't spot the top in time, as most of his profits were erased.
We often encounter similar situations in our own trading. We always hope that the market will rise just a little more before we close our positions, but in the end, the market takes back all the profits, and the money that should have been in hand is gone. This feeling is extremely painful.
That's why we often say that buying is for apprentices, and selling is for masters. Only by choosing the right exit points can we successfully "escape the top" and hold onto significant profits.
Today, based on my past trading experience, I will share 5 "top-escaping techniques" that you can flexibly apply in conjunction with your own trading system.
1. Large candlesticks with increased volume in the late stage of a one-way trend, especially those with fake breakouts.
The formation of this pattern requires two conditions.
First, there must be a significant one-way trend with very weak consolidation waves in between, meaning the market has risen in one go.
Second, after the market has risen, a large bearish candlestick appears at a high level with a greater amplitude than the normal candlestick movements during the trend.In the case of the two scenarios mentioned above, the probability of the market reaching a peak is quite high. Please refer to the image below. We will use the gold market situation encountered by the trader mentioned at the beginning of the article as an example for explanation.
The chart shows a 1-hour candlestick chart of gold.
The market started from 2390 and made a significant one-way run to 2480, rising by 90 dollars, with almost no proportionally coordinated correction waves in between; the market has been running in a one-way trend.
Subsequently, the market formed a large-bodied bearish candle at the top, with a space larger than any candle during the entire upward wave, reaching 23 dollars, indicating a strong bearish force.
After a simple correction, the market began to fall continuously for two days, quickly returning to the vicinity of 2400.
Technical standards that resonate with the large bearish candle can increase the success rate. This means that before the formation of the large bearish candle, the market had a fake breakout pattern at the top, breaking through the previous high of 2480, and then pulling back to form the large bearish candle, increasing the probability of a top reversal.
Other large candles with long upper wicks at the top, or large candle combinations indicating a reversal at the top, such as the bearish engulfing pattern, are also effective.
2. Minor divergence and candlestick pattern combinations.
Everyone is familiar with the MACD divergence technique at tops and bottoms, and many friends have told me that MACD divergence tends to become blunt and does not perform well. MACD itself is an oscillatory indicator, more suitable for trading in a range-bound market. Indeed, it can become blunt in a trending market. Therefore, in practical application, we should use other technical standards in conjunction with it to increase the probability of success.
We can use the MACD in conjunction with candlestick pattern combinations. When both standards appear, it confirms the signal to escape the top. Please see the schematic diagram below.The chart shows a 15-minute candlestick chart for spot gold. This segment of the trend is the same as the one mentioned earlier. After the market rises and reaches 2480, it fluctuates at the top, and the MACD shows a very clear top divergence. At this time, by observing the shape of the candlesticks, a double top structure is gradually formed. Once the double top breaks (the break price is at 2462), it can be judged that the top has arrived, and it is time to sell at the top. Everyone can see the two ellipses in the chart. When the market rises to 2438, there is also a top divergence in the MACD, but without the cooperation of the candlestick shape, it is not considered a signal to sell at the top. By filtering through the candlestick shapes, the accuracy of the MACD is improved.
Perhaps more attentive friends have noticed that a 15-minute candlestick chart is used here. In fact, whether it is the MACD or the combination of candlestick shapes, there is a lag. If you are trading a 1-hour market, waiting for the 1-hour MACD top divergence and the formation of the candlestick shape will have a significant lag, and the profit will be very severe. Therefore, this technical standard should be used at a smaller level.
Here is a view on trading technology:
Lagging technical standards can be used by reducing the cycle to increase sensitivity. If it is a sensitive technical standard, it can be used at the current cycle level.
3. Observe the trading volume to find a signal to sell at the top.
The volume indicator is a very important technical analysis tool. It shows the number of contracts traded within a period of time. By observing, you can understand the activity of the market, the comparison of the strength of the bulls and bears, and then analyze the trend changes to find a signal to sell at the top.
The chart is a 1-hour candlestick chart for the Shanghai Gold 2410 contract. After a significant rise in the market, it gradually reverses at the top, and the volume has a very clear reversal signal.
On the left at point A, during the rise of the market, with the rise of the positive line, the volume has been stable.In the middle section B, although the market continues to set new highs and closes with a bullish candle, the trading volume is noticeably contracting, indicating that the bullish momentum is weakening.
After the market fluctuates at high levels and then falls back, at the rectangular position C, when the bulls are reactivated, the trading volume of the four consecutive bullish candles is contracting significantly, far less than the volume of the preceding bearish candles, suggesting that the upward momentum of the bulls is insufficient.
The small bearish candle at the far right D, however, has created a very large trading volume, indicating intense contention between bulls and bears, but with the bears taking the initiative. At this point, one can judge that the market is turning bearish. To be cautious, one can take a proactive approach to close positions after the market breaks below the horizontal support level of 575.7.
There are two principles for judging the market peak using trading volume:
(1) Divergence between volume and price: When the price is at a high level with increased volume but limited gains, it suggests that the buying power in the market may be exhausted, indicating that the price is about to peak.
(2) Coordination between volume and price: When the market is at a high level and the trading volume gradually decreases, it shows that market interest is waning, which may lead to a price drop.
This method of volume analysis can only be used in futures and stock trading, as foreign exchange trading does not have a unified exchange, so the trading volume data is inaccurate and cannot be used as a reference.
Additionally, in practical applications, the volume indicator should also be used in conjunction with candlestick patterns, such as head and shoulders patterns, double top patterns, or in combination with MACD and RSI indicators to achieve a higher success rate.
4. Combination of moving averages and candlestick patterns.
Candlesticks and moving averages have a characteristic of mutual attraction, especially with medium-term parameter moving averages, as candlesticks tend to follow them closely yet at a distance. When they drift apart, they will slowly return and stick together; when they have been close for a long time, they will once again drift apart.In actual trading, when the market rises too quickly and for too long, and moves away from the moving average, the K-line will gradually return to the moving average as if attracted by it, showing signs of a potential market top. At this point, by observing the pattern of the K-line, one can make judgments and operations to escape the top.
The chart shows a 1-hour K-line chart of the Euro to US Dollar exchange rate. During the upward trend, the market has been following the 60-period moving average, slowly climbing upward, and in the latter half, a rapid upward trend was formed, creating a significant distance between the K-line and the moving average.
At this time, there is an expectation for the two to converge again. Combined with the reversal K-line at the top, it can be judged that the market has reached a temporary top, which can serve as a signal to escape the top.
It is recommended to use parameters between 60 and 120 as a standard. Too small a parameter will cause the moving average to stick too closely to the market, while a large parameter moving average will be slow to change, potentially missing the market opportunities.
5. Escape the top based on the regularity of market fluctuations.
I have a habit of observing the daily market trends. Through extensive observation, it is found that the fluctuation range of market trends follows certain patterns.
We can understand a trading instrument as an electric vehicle, which needs to be charged after running out of battery life. The trading instruments we deal with also need to consolidate strength after running through a certain space in the market.
There are two key points here:
(1) The fluctuation space of different instruments varies, just like the battery life of different electric vehicles.
(2) Before the market has completed its fluctuation space, there should not be a very coordinated corrective wave. If there is a corrective wave, it breaks the regularity of the operating space, and it needs to be recalculated. This is similar to an electric vehicle not having completed its range and charging in the middle to continue running, which requires recalculating the range.The chart shows the daily K-line of gold. Since the beginning of this year, gold has generally moved in a one-sided trend of about 100 to 150 USD before experiencing a significant correction. At such times, it is necessary to consider taking profits and temporarily exiting the market.
It is important to note that relying solely on the price range is not sufficient. The range can be used as a reference, and once it is reached, one should observe whether the K-line pattern also simultaneously shows a signal to take profits. Dual verification makes the approach more robust.
Additionally, after the range is reached, one might consider reducing the position to lock in some profits and then observe the K-line pattern. If the pattern appears, continue to reduce the position or close it; if the pattern does not appear, hold onto the order and aim for a larger profit.
To apply this logic, one must have long-term observation of a particular commodity and a thorough understanding of its fluctuation range and patterns.
This is also the trading philosophy I have always advocated: the selection of trading commodities should be about precision, not quantity. Anything done with a certain level of precision can definitely make money.
6. Notes on taking profits at the top:
(1) Take profits in batches. We can combine different technical criteria, such as 1-3 criteria, and close a portion of the position in batches for each criterion that appears.
(2) No one can accurately and 100% successfully take profits every time. There will be profit-taking with any exit strategy. We must accept this reality, refine our technical criteria, and control the profit-taking within an acceptable range.
(3) All top-taking techniques are also suitable for reversals at the bottom. The two are mirror images of each other, and the methods of use are the same.
(4) When the top arrives, taking profits in batches is a good position-closing technique. From a psychological standpoint, locking in some profits first leads to a more stable mindset, which is conducive to subsequent execution. In terms of profit, after closing a portion of the position, if the market reverses, there will still be some profit.But if you don't close the position, the profit might be completely gone. On the other hand, by partially closing the position, if the market moves significantly afterward, you can still hold onto some profit. In the long run, the overall profit won't be greatly affected, but the difficulty of execution is reduced significantly.
That's it for today's sharing. Do you have any better experiences in escaping the market top? Feel free to share your comments below.
