Essentially, every trader has the desire to predict tops and bottoms because after the tops and bottoms, the trend is about to reverse. By capturing the tops and bottoms, one can have the best entry points, and after the market reverses, the profit potential is also the greatest.

So today, I will combine my own trading experience to share 4 methods for identifying trend tops and bottoms with you, and I will provide specific entry methods, as well as stop-loss and profit-taking strategies, which can help you more completely implement technical operations.

The article is relatively long, so you can bookmark it for reading. If you find it helpful, you can give the article a like, thank you.

Controversy about top and bottom trading.

Before I start explaining the technical methods, let me first talk about the controversy surrounding top and bottom trading.

In the trading community, it is generally believed that top and bottom trading, which involves guessing the tops and bottoms, is a contrarian operation, and therefore is criticized by many trend traders. I also particularly understand this point of view.

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However, we must also objectively view the advantages and disadvantages of different trading models. Choosing top and bottom trading will indeed allow for earlier entry compared to trend-following trading, and the potential to capture more profits, which is an advantage. But top and bottom trading can also suffer from the trouble of consecutive stop losses in a one-sided market, which is a disadvantage.

So whether it is trend-following trading or contrarian trading, both have their pros and cons. We must remember that the essence of trading is to exchange risk for profit, and you have to make a choice, to choose which part of the risk to bear, in fact, following the trend or going against it is the same.

Our only goal is to make money. Whether it's a black cat or a white cat, the one that can catch mice is a good cat, and a strategy that can make money is a good strategy. Don't be too entangled in its definition and rules.

Method 1: A rapid volume increase after a significant market movement is a signal of a trend reversal.The market trend always cycles and alternates between bullish and bearish phases. There is a saying: "After reaching the peak, it declines." When the market moves significantly in one direction, it often implies that the trend may reverse. A rapid increase in trading volume at the end of the trend is an important signal that the trend is about to reverse.

Let me illustrate this with a diagram for everyone to see.

In the diagram is the 4-hour candlestick chart of the British Pound against the US Dollar. The market started to decline from a high position, forming a continuous five-wave downward trend.

In the 5th wave, the market moved downward very quickly, with four consecutive large bearish candles, and the decline in price was also significant.

After four candles, a main bearish wave was completed, which is in line with the characteristics of a large and rapid movement. Subsequently, the market bottomed out and, after consolidating at a low level, reversed and moved upward.

Entry, stop-loss, and take-profit criteria:

For this structure, you can use a reversal candlestick at this level, or a breakout reversal at a smaller level.

Let's look at a diagram for entry.

In the diagram is the 15-minute candlestick chart of the British Pound against the US Dollar. After the market bottomed out and entered a consolidation phase, an entry was chosen at the 15-minute level with a breakout structure from the bottom, which is the position marked by the blue circle in the diagram.Set the stop loss at the lowest point of the market trend, and after entering the market, set an exit with a profit-to-loss ratio of more than 5:1, or follow the 4-hour trend to exit, both methods will result in a very reasonable profit-to-loss ratio.

Let me briefly explain the specific definitions of "significant" and "fast" so that everyone has a clearer understanding.

There are two modes for defining "significant": one is that the market trend completes at least five waves, and during the 5th wave or the subsequent main rising or falling wave, there is an acceleration in the market trend. The other is that the market trend does not follow a wave structure but instead moves in a single direction, yet the amplitude of the market movement has reached or exceeded the normal five-wave amplitude.

The definition of "fast" is when the market shows a continuous series of bullish or bearish candlesticks, with little or no retracement in between, covering a large space.

This type of market movement is known in the industry as "pump and dump," which means that at the end of the market trend, the market makers quickly push up the prices to create an illusion that the market will continue to rise or fall sharply, luring retail investors to chase the trend. At this point, the market makers can take advantage of the high prices to sell off their positions, trapping the retail investors.

Method 2: Trend reversal when the market reaches historical high or low points.

Historical high and low points of the market are often significant support and resistance levels. When the market tests these levels, it implies the possibility of a trend reversal.

The chart below is the weekly chart of spot gold. The market reached a historical high of 2072 in 2020 due to the pandemic and then entered a high-range consolidation.

In 2022, influenced by the Russia-Ukraine conflict, the market tested the historical high of 2072 and then reversed, falling sharply. Last week, it tested this historical high resistance again and quickly reversed, coming back down, and moving bearish.

Standards for entry, stop loss, and take profit:The forces of historical high and low pressure and support are very strong. When the market reaches these levels, it often reverses quickly, and the opportunities to enter are fleeting and difficult to grasp. One can wait for the market to stabilize and then choose to enter on a small scale during a second rise or a fall.

Let's look at a diagram of an entry point.

The chart shows a 15-minute candlestick chart of spot gold. The market quickly surged, tested the historical high pressure at 2072, and then fell back, testing the moving average and finding support before a second rise. At the high level, a reversal candlestick pattern is formed, which is a good time to enter a short position.

Aggressive traders can directly set their stop loss at the high point of the reversal candlestick, while conservative traders can set their stop loss at the previous high of 2079, with a large reward-to-risk ratio of more than 5:1 for exiting, or follow the trend directly for an exit.

Last year, the euro to US dollar exchange rate reached a historical 1:1, which was also a similar type of trading opportunity.

Because historical high and low points are special, such trading opportunities are not many, and in practice, one can also choose the weekly chart level, with important support and resistance levels as the standard for trading. These types of trading opportunities have a low frequency and are suitable for part-time long-term traders.

Method 3: Trend reversal after grinding the top and bottom.

Grinding the top and bottom refers to the market losing direction and entering a consolidative pattern after a significant rise or fall, characterized by rapid and continuous, irregular fluctuations. During the consolidation, the forces of bulls and bears gradually shift, and after a breakout in the opposite direction, the trend reverses.

The chart shows a 1-hour candlestick chart of spot gold. After a five-wave decline, the market began to enter a horizontal grinding bottom consolidation.

Throughout the grinding bottom process, the market experienced quick rises and falls, forming an irregular consolidation pattern, and after continuous fluctuations, the market reversed and moved into a bullish trend.Standards for Entry, Stop Loss, and Take Profit:

During the bottoming process, the market continuously tests the bottom. In the later stages of bottoming, after a reversal candlestick pattern forms at this level, one can directly enter the market, setting the stop loss at the lowest point of the bottoming pattern.

In the three red circles on the right side of the chart, a reversal candlestick pattern has been formed consecutively, all of which are structures that can be entered.

After entering, set the stop loss below the low point in front of the bottoming, set a large profit-loss ratio of more than 5:1 for exit, or directly follow the trend to exit.

Emphasize the word "grinding", which has two meanings.

The first refers to the market fluctuating and consolidating in a relatively narrow area, not moving in space, grinding in place, and completing the conversion of bullish and bearish forces.

The second refers to the fact that such a market is not easy to trade, tormenting the mentality.

In this kind of fast narrow range fluctuation market, trend traders will suffer consecutive losses, which is very tormenting to the trading mentality.

But trading is like this, tempering people's patience, tempering people's determination, the trend will always grind people's temper on the ground, which requires us to have a very strong heart, to view the trend of grinding top and bottom with a calmer perspective.

However, it can also be understood from another perspective, when the market torments people, it is often also the time when opportunities are brewing.Method 4: Reversal after a 90-degree rise (fall), indicating a trend reversal.

There is a rather unique pattern in market trends, where the market rises or falls almost vertically at an angle close to 90 degrees. These types of movements are typically very rapid, and after the volume has been exhausted, the market enters a reversal phase.

The chart below is a 1-hour candlestick chart of spot gold. The chart shows multiple instances of reversals after 90-degree rises or falls. After the market volume increases, it will enter a temporary consolidation pattern, and after a period of consolidation, the market reverses.

Standards for entry, stop loss, and take profit:

After the 90-degree move, the momentum gradually dissipates, and at the tail end of the trend, a reversal candlestick pattern will form, or the market will enter a converging consolidation. A break of the reversal candlestick or the converging consolidation pattern can be used for entry.

Let's look at a schematic diagram for entry.

The diagram shows the structure for entry after a 90-degree rise or fall and a reversal.

In the blue circle, the structure for entry based on the reversal candlestick pattern and consolidation pattern is indicated. Stop loss can be set at the high and low points of the market, with a large profit-to-loss ratio of more than 5:1 for exit, or one can directly follow the trend for exit.

Three points to note:

(1) When using the reversal candlestick pattern for entry, it is essential to use the standard pattern.(2) If the reversal pattern's candlestick is too large, resulting in a wide stop-loss, one can wait for a market pullback before entering, which can yield a better risk-reward ratio. In the case of a market that does not pull back, it is better to miss out than to be aggressive.

(3) After a 90-degree rise or fall, traders may experience significant fear, as the market has just shown strong one-sided movement. Most people will naturally assume that the trend will continue. However, often the more a trading opportunity deviates from human nature, the better the trading outcome tends to be.

In Dow Theory, there is a discussion about the angle of trend movement: a trend moving at a 45-degree angle is considered the healthiest. Rapid, straight-line rises or falls are often signals of a trend reversal.

I will conclude the discussion on these four methods for determining tops and bottoms, and now I will talk about the precautions to take when trading tops and bottoms, which everyone should consider together.

Precautions for Top and Bottom Trading:

(1) Trends come in different scales, and so do reversal trades.

For reversal trades at tops and bottoms, one can operate at different time scales. It is advisable to select a fixed time scale for trading.

Personally, I recommend focusing on top and bottom trades that are above the 1-hour time frame, as they offer a larger profit potential and do not require constant monitoring of the market, making them suitable for the majority of part-time traders.

(2) Conduct backtesting.

The methods discussed above should be backtested before applying them in live trading to further refine the details and to get a feel for the frequency of trading and the duration of holding positions before considering actual trading.(3) Consider your own circumstances and choose the methods and varieties that suit you.

Before engaging in actual combat, everyone should select 1 to 2 methods of operation that suit their own schedule, work rhythm, and risk preference, and choose varieties that they are familiar with.

(4) Turn tops and bottoms into "trend-following" by adding positions after they emerge.

The methods discussed today are relatively aggressive, entering the market at the tops and bottoms, and after the orders are placed and start to generate profits, one can add positions after the tops and bottoms break and confirm a reversal. This combines contrarian and trend-following strategies to achieve better profit outcomes.