How to trade a "Blow-Off Top" chart pattern?

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Roundtable Knight
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How to trade a "Blow-Off Top" chart pattern?

Post by rhc » Wed Oct 27, 2010 12:57 am

The Cotton ‘rubber-band’ seems quite stretched & ripe for a snap back. . . . but then it also seemed that way back in mid-late September.
So, how does one handle a ‘blow off’ top like this one?

One thing you might do is gradually scale-out (exit the position in pieces), at higher and higher profit target prices, then exit the last lonely contract via a discretionary decision. o.k. fine. How else might someone exit a market that is deemed to be in ‘blow off’ mode.

Obviously we would need to define what is a blow-off.
1) We could say that once a market has had ‘x’ higher Weekly closes in a space of ‘x’ weeks (or even ‘x’ plus 1 weeks) then it’s in blow off . . . . As at today, I note that cotton has had 9 higher weekly closes in the last 10 weeks
2) We could say that once a market is very extended relative to its 200 day moving average then we are in blow off. . . . .As at today, I note Cotton prices are approx. 60% higher than the 200dma.
3) Gaps on a weekly chart can perhaps be a good sign of exhaustion. . . . Cotton has gapped up this week.
4) We could further say that once we have ‘y’ ATR of profit (with ‘y’ being a largish number) together with items 1 and/or 2 and/or 3 above then we are in blow off mode.

Obviously the more conditions we introduce the more risk we run of fitting the price chart to our blow-of equation. The above is just food for thought only.

So once a blow-off has been defined how does one exit?
1) We could apply any number of close trailing stop methods to take effect ONLY when the blow-off definition has been given (i.e. SAR parabolic, ratchet stops, chandelier stops etc)
Obviously, if no blow-off, then no trailing stops
2) A Chart Pattern type exit (i.e. Weekly key reversal down, Island reversal, Gap Down etc)
3) or simply shorten the period of your own favourite exit , whatever that may be.

These interesting market events are rare so perhaps we could add conditions into our systems that take these into account.
Having said all that, if anyone has explored this kind of phenomenon perhaps they could share their thoughts on the subject.


For the sake of historical interest, Copper futures experienced a similar blow off move back in early 2006 with 9 higher weekly closes and at the peak, prices were nearly 90% higher than its 200dma!!. Wow!
Copper also had no less than 3 weekly gaps to the upside during its run up. Wow again!

Coffee Futures experienced crazy blow offs in early 1997 and also in early 1994.


The only caveat I can see is that one man’s blow-off move is another man’s mild rally.
My own Cotton position was exited in mid September, others left the party just a few days ago and still others may leave later on at higher levels. . . . .or at much lower levels!
Dec 2010 Cotton
cotton_chart.png (15.88 KiB) Viewed 3098 times

Roundtable Knight
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Re: How to trade a "Blow-Off Top" chart pattern?

Post by alp » Wed Oct 27, 2010 9:25 pm

rhc wrote:My own Cotton position was exited in mid September...
The only way to know how to exit a blow-off is by defining what a "blow-off" is, in the ever evolving moment of "now".
NowClock.jpg (8.49 KiB) Viewed 3026 times

Roundtable Knight
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Post by sluggo » Thu Oct 28, 2010 7:27 am

That image has been rotated. Notice that the short ("hour") hand indicates the time is BEFORE nine-o-clock, while the long ("minute") hand indicates the time is AFTER nine-o-clock.

The correct orientation is shown below.
wrongo.jpg (39.19 KiB) Viewed 2990 times

Moto moto
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Post by Moto moto » Thu Oct 28, 2010 4:53 pm to trade a blow off pattern?
A...If using some discretion in the trading, and you have a reasonable understanding of simple options trading, and there is a liquid, reasonably priced (the big issue) availability of options traded. Then you could substitute longs for calls, or hedge the position using puts (a synthetic long call).

(The number of alternatives for choices of series/strikes/months requires discretion)

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