2618 (Double top & 0.618 pull-back) - do not miss it!!In the last couple of TAs I have mentioned the “2618 pattern” and have been asked what 2618 means. Sorry for taking it so long as it took me quite a while to put everything altogether. But, as promised, I have explained below the rules and trade setups for the 2618 pattern.
What are the rules/setups/steps for 2618?
1. Form a double top (Note #1)
2. Neckline has to be broken
3. After price found support at point (b), wait for pull back to 0.618 fib retracement of (a)(b)
4. After price retraced to 0.618, look for confluence and sell (eg. Structures, trendlines , double top on a lower time frame, rsi divergence, bearish pin bar , inside bar break down etc.) (Note #2)
5. Stop loss to be set above double top
6. Set Take Profit levels (Note #3)
Note #1 (Double top):
The first step for the formation of 2618 is to form a double top at key resistance levels. Why at key resistance levels? Because we want to avoid fake double tops which can occur occasionally.
There are some variations between various resources (books, websites) regarding the definitions of “double top”. The main differences occur where:
a) Some said for a double top to be valid, the wick of the 2nd top cannot exceed the wick of the 1st top; whereas, others said:
b) The wick of the 2nd top can exceed the wick of the 1st top but the candle close of the 2nd top CANNOT exceed the wick of the 1st top; or
c) The wick of the 2nd top can exceed the wick of the 1st top and the candle close of the 2nd top CAN exceed the wick of the 1st top; or
d) The wick of the 2nd top meets at least the candle close of the 1st top; or
e) The body of the 2nd top cannot exceed the body of the 1st top
Personally, I would say all the above definitions work just fine although I do prefer definition a) because it means that the selling pressure is strong and the bulls fail to make a higher high. When there is a higher high formed in a downtrend, it can mean the downtrend has reversed and therefore you might not want to sell when the price pulls back to the 0.618 fib retracement.
Note #2 (0.618 retracement):
When the price pulls back to 0.618, it does not mean to sell straight away. There must be more than one reason to sell other than the 0.618 retrace. The more reasons the better. In this example, you can see there are certainly structures (key resistance levels) at the 0.618 retrace. As well, there was a double top formed on the lower time frame. Consequently, you can sell.
After BTC hit the 0.618 retrace the first time, the price dropped from $9735 to $8650. but quickly bounced back to the 0.618 retrace level. That was a second & better opportunity to sell. Not only did BTC form a double top on the larger time frame, but also with a bearish divergence on the 4hr time frame. Accordingly, you have more reasons to sell.
Note #3 (Set take profit)
Same as the rules of “Double top”, there are some variations as to which price level should you take profits. Personally, I would stick to the below:
1) First, take profit when risk/reward ratio hits 1:1 (recommend to take 30% - 50% profits and adjust the SL of the remaining positions to break-even)
2) When price hits the same price level as the low after the neckline is broken ((b) point in this example)
3) When price hits 1.272 fib extension of (a)(b)
4) When price hits point (d) (using AB=CD pattern. If you are not sure what the rules of AB=CD are, you can refer to my previous TA in which I have attached the link below)
5) If in a one-way market (heavily bearish/bullish), you can always keep 10% to 20% of your positions and take profits when risk/reward ratio hits 1:5 or even 1:10
If you have enjoyed this post and would like me to do more of this kind of educational post going forward, please give it a "LIKE" as this post has taken me more than 4 hours to put everything together.
Lots of love,
Taiwan Bear
