Wammies and Moolahs

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The market moves up, the market moves down. If you are a naked trader, you will probably note that the turning points in the market coincide with the support and resistance zones. These turning points are rarely sharp and quick and are, instead, often rather slow to unfold. The market usually prefers to hit a zone several times before moving away from that zone. Wammies and moolahs take advantage of this tendency in the markets.

There are five steps to understanding wammies and moolahs. Each of these steps is covered in this topic. By the end of the topic you will understand the theory behind these two trading set-ups, and you will know precisely how to trade them.

First, the basic double-bottom and basic double-top formations are defined. Second, you will learn the critical characteristics unique to wammies, which are a special case of the double-bottom formation. Third, you will learn all about the moolah, a special case of the double-top formation.Fourth, you will see market examples of both wammies and moolahs so you may clearly understand the idiosyncrasies unique to these formations. Fifth, you will see what an optimal wammie or moolah trade looks like. By the end of this topic, you will have a clear understanding of both trade set-ups, which are invaluable for the naked trader who is interested in finding important turning points on the charts.

Before you jump into the world of wammies and moolahs, it is important to understand both the double-bottom and the double-top formations.

THE DOUBLE BOTTOM

The double bottom is a classic formation known to many technical analysts.The double bottom is well known because it occurs quite frequently in the markets. Take a look at the chart for any market and you will find many examples of the double bottom; these are places on the chart where the market touches a zone from above and finds significant support after both touches.

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Many critical market turnarounds begin as a double bottom. A double bottom occurs when the market moves downward for some time, the market reaches a significant support and resistance zone, the market pauses at this zone and then turns around to begin trading higher. The market eventually stalls and starts to move downward again until reaching the zone once again and finding support on the zone. Once again, the market starts to trade higher and continues trading higher for some time. This is the traditional double bottom.

FIGURE 7.1 The double bottom is indicated on this daily GBP/CHF chart by the market touching the zone, trading higher, and then touching the zone again. © 2000–2011, MetaQuotes Software Corp.
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Take a look at Figure 7.1; this is a typical double-bottom formation. Notice how the market reaches a zone twice and each time it turns around and starts trade higher. It is only after the second touch of the zone that the market starts a new uptrend. This is the defining feature of the double bottom—the market begins a new uptrend after finding support with the second touch of the zone.

This GBP/CHF daily chart in Figure 7.1 is a typical double bottom. After trading lower and lower for some time, the market touches the critical zone at 1.5890 before trading higher for a short period of time, the market once again falls down and finds support on the 1.5890 zone and bounces higher. After the second touch, the market begins a new uptrend. This double-bottom formation is reliable; under most circumstances, if the market falls down to an important zone and finds support on the zone twice, it will be likely to trade higher.

These double bottom formations are prevalent across markets, much more ubiquitous than the “single bottom.” A single bottom is, of course, a single touch (of support) on an important zone. Although the single bottom does occur from time to time (single bottoms sometimes print as bullish big shadows, bullish big belts, and bullish kangaroo tails), the double bottom is much more common in the markets. The market will usually fall down to the zone to test it twice before turning around and marching upward.

Figure 7.2 illustrates another double bottom on the USD/CAD daily chart. Notice how each touch on the 1.5105 zone is distinct. The market falls down, touches the zone, and then briefly trades higher before falling down once again to find support on the very same zone. This is the defining characteristic of the double bottom: There is a brief interlude between each touch.

FIGURE 7.2 The standard double-bottom formation is created when the market finds support twice in quick succession. The USD/CAD forms a double bottom on the daily chart when the market falls twice to 1.5105 to find support. © 2000–2011, MetaQuotes Software Corp.
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The USD/CAD traded 715 pips higher after the double bottom on the daily chart (see Figure 7.2). This is the kind of move traders dream of capturing. However, not all double bottoms will yield a giant pile of pips such as this one. Some double bottoms end up as losing trades.

In Figure 7.3, the EUR/GBP makes a double bottom at 0.8800 on the daily chart. The market trades higher after the second touch on the zone at 0.8800, a classic double-bottom formation.

FIGURE 7.3 A double-bottom forms on the EUR/GBP daily chart. Themarket twice bounces off the zone at 0.8800. © 2000–2011, MetaQuotes Software Corp.
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Soon after the second touch at 0.8800 zone, the move upwards stalls, and the market falls through the 0.8800 zone, as shown in Figure 7.4. This trade would have been a loser for many traders looking to find profits on this classic double-bottom formation. This is the problem with double bottoms, while many of them identify excellent trading opportunities, some of them are losing trades.

FIGURE 7.4 The market trades as high as the 0.9020 area before falling back down. This classic double bottom on the EUR/GBP daily chart would have ended up as a loser for many traders. © 2000–2011, MetaQuotes Software Corp.
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Perhaps you have traded this formation in the past and have experienced some winning double bottoms and some losing double bottoms. You may have decided that the double bottom is not a reliable trading formation. If you have dismissed the double bottom, please wait until you learn about the wammie trade, because you may find that there is still hope for the double-bottom trade, or at least for a very specific type of the double bottom. Next up is the double top, the mirror image of the double-bottom formation.

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The standard double top looks like the chart in Figure 7.5: The market trades higher for some time before finding resistance on a zone. Themarket briefly trades lower before once again rising up and finding resistance on the zone, and then themarket begins to trade lower and lower. The defining feature of the double top is that the market begins a new downtrend after the second touch of the zone.

FIGURE 7.5 The standard double-top formation is created when the market finds resistance twice in quick succession. The USD/CHF forms a double top on the fourhour chart when the market trades up to 0.8500 twice to find resistance. © 2000–2011, MetaQuotes Software Corp.
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Double bottoms are reversal formations, and they are much more common than other reversals, such as the big belt or kangaroo tail. Markets love to touch zones twice before turning around and moving in the opposite direction. This is why the double top has become well-known in the trading community over the years. It is a classic chart formation.The problem with this classic chart formation is this: It often fails. The double top will often print on the charts and then completely fall apart.Some double tops simply do not behave.

FIGURE 7.6 The USD/CAD four-hour chart prints a classic double-top formation.The market does fall after the second touch at the 1.0450 zone, but soon after the market trades higher and higher.
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The double top in Figure 7.6 is a classic example of a double top gone bad. Some double tops simply lose. Perhaps it is possible to trade a classic double-top formation, even though many double tops end up as losers. Might there be characteristics that winning double tops share? Is there a way to discriminate those double tops which are more likely to fail from those double tops which are more likely to find pips?

The moolah trade is a specific type of double-top formation. A close examination of the definition of the moolah will enable the naked trader to decide whether this specific type of double-top formation may improve on the success rate of the classic double-top trade.

IDENTIFYING WAMMIES AND MOOLAHS

Wammies and moolahs occur on any timeframe, in any market, so these catalysts are similar to most of the other naked trading patterns in this topic. Wammies and moolahs are unique versions of the double bottom and double-top formations, respectively. You will learn how to filter out subpar double-bottom and double-top trades. Concentrating on only those double bottoms and double tops with optimal trade characteristics (such as wammies and moolahs) will allow you to trade only those double bottom and double tops that offer the high probability of a payoff.

Wammies and moolahs also fit into the general category of reversal patterns. Naked traders who enjoy entering trades at turning points in the market will find wammies and moolahs particularly interesting and useful. Before we jump into these price patterns, it may be useful to list several important market truths. We will incorporate these seven market truths when we look at trading wammies and moolahs.

1. If the market touches a zone twice in succession, it will often move away from the zone.
2. Two touches on a zone from above suggests a market bottom.
3. When the market makes higher lows, it will often continue upward.
4. Two touches on a zone from below suggests a market top.
5. When the market makes lower highs, it will often continue downward.
6. A bullish candlestick on a support zone suggests the market will trade higher.
7. A bearish candlestick on a resistance zone suggests the market will trade lower.

Wammies and moolahs are based on these market observations. If you agree with these market observations, then you may enjoy trading wammies and moolahs.



HOW TO TRADE WAMMIES

As a naked trader, you get paid to observe market patterns, test these patterns to validate their usefulness, and then execute trades based on these patterns. These naked trading patterns occur over and over again, in many markets, on many timeframes. Wammies are a specific subset of the double-bottom formation.

Just like the standard double bottom, the wammie formation includes two touches on the zone, suggesting that the market finds support on the zone. The market will drift higher between the first touch on the zone and the second touch on the zone. The wammie differs from the standard double bottom because the depth of the touches on the zone is critical.

A wammie formation is identified by a second touch that is higher than the first touch on the zone. In other words, a wammie is defined by a higher low. Recall that a higher low is one way to determine if the market is in an uptrend, this was one of the seven market truths. This subtle difference between a wammie and a standard double bottom may seem insignificant, but this is a critical characteristic of the market’s turning points.

FIGURE 7.7 The AUD/USD four-hour chart prints a wammie in the 1.0560 zone.Notice the second touch is higher than the first. The market traded 456 pips higher after this second touch.
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In Figure 7.7 we see an example of a wammie trade. The AUD/USD four-hour chart prints two touches in the 1.0560 zone. The second touch on the zone is higher than the first by 34 pips.

The entry strategy for the wammie is as follows: Once the market prints a strong bullish candlestick on the second touch, a buy stop is placed above the high of this candlestick. Using a buy stop ensures that the trade will only be triggered if the market trades higher than the bullish candlestick.

FIGURE 7.8 The AUD/USD four-hour wammie trade is triggered once the market trades higher than the bullish candlestick on the second touch.
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In Figure 7.8, the market prints a bullish candlestick on the second touch of the 1.0560 zone. The buy stop is placed a few pips above the high of the bullish candlestick. Once the market trades higher than the bullish candlestick, the trade is triggered.

The stop loss for the wammie trade is placed below the low of the first touch (see Figure 7.9). Placing the stop loss here ensures that if the market is beginning a new uptrend, the stop loss will not be triggered. If the market is moving higher it will not take out the lowest low of the wammie formation.

FIGURE 7.9 The stop loss for the wammie trade is a few pips below the first touch on the zone. If the market begins a new uptrend, the stop loss will not be hit.
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Wammie trades are designed to capture strong trends. There are several clues provided by the market when a wammie trade prints. First, the market has twice found support on a critical zone. Second, the market has made a higher low. This is a critical characteristic of the wammie, because it suggests the downside momentum may be dying out. Third, the market has printed a strong bullish candlestick on the zone and the market has traded higher than this bullish candlestick, a strong hint that the market may be ready to trade higher. Taken individually, each wammie characteristic is indicative of a market likely to trade higher, but collectively these characteristics suggest a market ready to take off.

FIGURE 7.10 The GBP/USD daily chart prints a wammie trade set-up. 1. The buy stop is placed a few pips above the first bullish candlestick after the second touch. 2. The stop loss is placed a few pips below the first touch. 3. The market unexpectedly falls back down and touches the zone again, but the stop loss is not triggered and the market soon accelerates 716 pips higher.
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Take a look at Figure 7.10. This is another wammie trade on the GBP/USD daily chart. The important features of this trade are marked with the numbers 1, 2, and 3. At 1, the buy stop is placed a few pips above the first bullish candlestick after the second touch on the 1.9400 zone. Notice that the previous candlestick is not a bullish candlestick, because this candlestick closed near the midpoint.

This is why the buy stop is placed above the next candlestick, the first candlestick with a close near the high of the candlestick. At 2, the stop loss is placed a few pips below the first touch on the 1.9400 zone. Placing the stop loss here improves the chances that the trade may survive another touch of the zone. At 3, the market falls back down and touches the zone once again. Notice here how the trade survives this third touch on the zone because the stop loss is placed below the first touch.

This third touch on the zone will occur after some wammie trades, so it is important to place the stop loss below the lowest (first) touch. If the stop loss is beneath the second touch, this trade would have been a losing trade. With the correct stop-loss placement, the trade survives this third touch and collects 716 pips.

The simplest way to profit from the wammie trade is to simply place a profit target at the nearest zone. More complex exit strategies are covered in Chapter 11, but for now it is important to note that taking profit at the next zone is a great way to manage exits with the wammie. In Figure 7.11 we see another wammie on a daily chart, this time it is the AUD/JPY.

FIGURE 7.11 The AUD/JPY wammie trade on the daily chart has all of the typical wammie trade characteristics.
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There are five important trade characteristics, each of them marked in Figure 7.11. At 1 the market first finds support on the 75.00 zone with a nice bullish candlestick; the close of the candlestick is up near the high. At 2, the second touch is a few pips higher than the first touch, which qualifies this double bottom as a wammie.

At 3, the buy stop is placed a few pips above the second bullish candlestick after the second touch. Notice that there are several candlesticks after the second touch, but the buy stop is placed above the first bullish candlestick with a closing price near the high of the candlestick.

Only the second bullish candlestick after the second touch qualifies as a valid wammie entry candlestick. The wammie buy stop should be placed a few pips above the first strong bullish candlestick. At 4, the stop loss is placed a few pips below the first touch for a total risk of 150 pips. At 5, the market achieves the profit target at the next zone at 78.20 for a total of 235 pips.

One final note about the wammie trade: It is important to only take those wammie trades that touch the zone once, move away from the zone, and then touch the zone again. Moving away from the zone after the first touch is critical, and this is why there is a rule for the number of candlesticks between the two touches.

A wammie trade is only valid if there are at least six candlesticks between the first and second touches. If there are fewer than six candlesticks, it is likely that the market may be gearing up for a push beyond the zone. This is because breakouts often occur when the market repeatedly touches the zone in quick succession. Take a look at the charts, you will probably notice that many breakouts occur after the market repeatedly touches a zone (see Figure 7.12 for an excellent example of this).

FIGURE 7.12 There are multiple touches on the 0.9400 zone on the USD/CHF four-hour chart. This is a hint that the market is likely to push through the zone.
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The very best wammies will not have very quick touches on the zone, but rather the market will touch the zone, start to trade higher for some time, and then fall back down to touch the zone again. Be wary of wammies with quick touches on the zone, as this may suggest the market is going to push through the zone in the immediate future.

The wammie trade is a simple but powerful trade. Now go back and take a look at the charts in the double bottom section of this chapter. Do you notice anything about the two double-bottom trades? Compare the double bottom in Figures 7.1 and 7.2 to the double bottom in Figures 7.3 and 7.4. What do you notice about those trades?

Wammie Characteristics
These are the seven important characteristics of the wammie pattern.
1. The market touches the support zone twice.
2. The second touch is higher than the first touch.
3. There are at least six candlesticks between touches.
4. The market prints a bullish candlestick on the second touch.
5. The trade is entered with a buy stop a few pips above the bullish candlestick.
6. The stop loss is placed a few pips below the first (lower) touch.
7. The profit target is the next zone above the wammie.

Now you understand the wammie trade, it will be very easy for you to understand how to apply the same principles to the moolah strategy. The moolah is simply the wammie trade but in reverse. So, where the wammie is a special case of the double bottom, the moolah is a special case of the double top. Like the wammie, the moolah has several characteristics that are critical to the identification of the moolah set-up.

Also, the moolah has specific rules for managing the stop loss and a sell stop entry for this trade.The moolah is simply a double top on an important support-andresistance zone.


FIGURE 7.13 Moolah trade on the USD/JPY daily chart. The important characteristics of this trade are marked with numbers 1 through 4.
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See Figure 7.13 for an example of the moolah trade on the daily USD/JPY chart. The important aspects of this trade are marked with numbers in Figure 7.13. At 1, the market makes the first touch on the 119.75 zone and then soon falls lower. This is also where the stop loss is placed, a few pips beyond the first touch at 1 on the chart. The market trades lower, then makes another run higher and touches the 119.75 zone, this time lower than the first touch, at the spot marked 2 in Figure 7.13.

Notice that there are more than six candlesticks between the candlestick that first touches the zone and the candlestick that touches the zone again at 2 on the chart. At 3, the sell stop is placed a few pips below the low of the first bearish candlestick after the second touch.

The market triggers this sell stop on the next candlestick and falls to the first zone at 118.15, but because this zone is only 67 pips lower than the entry price (and the stop loss is 108 pips from the entry price), the trade is held all the way down to the next zone at 117.50, at 4 on the chart, for an overall profit of 133 pips.

The moolah trade is a simple but powerful trade, the rules are simply the same as for the wammie trade, but reversed for double tops. Take a look at the charts in the double top section of this chapter. Do you notice anything about the two double-top set-ups? Compare the double top in Figures 7.5 and 7.6.

Moolah Characteristics
These are the seven important characteristics of the moolah pattern.
1. The market touches the resistance zone twice.
2. The second touch is lower than the first touch.
3. There are at least six candlesticks between touches.
4. The market prints a bearish candlestick after the second touch.
5. The trade is entered with a sell stop a few pips below the bearish candlestick.
6. The stop loss is placed a few pips above the first (higher) touch.
7. The profit target is the next zone below the moolah.

TIPS FOR WAMMIES AND MOOLAHS
It may be tempting to take every wammie and moolah that appears on your charts, but it is important to note that some wammies and moolahs are better than others. If you want to pick only the very best wammies and moolahs, try to do the following:

Choose the set-ups with many candlesticks between touches. Six candlesticks between touches is nice to see, but 20 candlesticks between touches is better. touches is better.

• Take trades with catalysts on the second touch. If the second touch is a big shadow or a kangaroo tail, the odds are probably strongly in your favor.
  
• Pick trades that have a second touch much further from the zone. Figure 7.13 is a great example of this type of trade. The second touch is a full 22 pips lower than the first touch, suggesting that the market is running out of steam.
  
• Only choose wammies and moolahs that are in strong, well-defined zones. If the zone is not an important one, then the market may only trade away from the zone briefly before breaking beyond the zone.
  
• Find set-ups that have very few zones nearby. This will enable you to place a profit target very far from the entry price and maximize profits.
  
• Trade those wammies and moolahs that have “room to the left.” This idea is covered in the kangaroo tail our next topic. Major reversals often occur at places on the chart with very little price action to the left of the trade set-up.