Oliver Velez explains the "twin tower" set-up, which can accurately predict market bottoms and create an opportunity where it actually pays to go "all in" to maximize profit potential.

My guest today is Oliver Velez, he’s been in this industry for a very long time, seen many, many strategies. We’re going to talk to him about one today that’s working well and that his students are using. Oliver, talk about this strategy you’re using today that works.

We have a plethora of strategies that we deploy in the markets every single day, but there is one in particular that we have a cute little nickname for: it’s called the “twin tower set-up.”

It’s very appropriate for the market that we’re experiencing recently, so some of your listeners might be able to take advantage of this.

In a declining market, there is on key set-up that tends to mark the final low in a steady decline, based on our backtesting, as high as 92% of the time. After a steady decline, the market takes an additional sudden drop, producing one solid, fat, long, red bar on the daily chart.

So imagine an item that’s been declining for quite some time and almost suddenly falls out of bed in a more rapid rate in a single day. That is capitulation; if that is followed by an even bigger green daily bar—so if a sudden long sharp bar to the downside is followed immediately by an even more powerful up bar that takes out the high of that solid red bar to the downside, that’s what we call the twin tower.

One of the towers is red and the one next to it is green, taking out the high of the red. We put a stop under that two-bar low and we’ve found that to be the final low set-up 92% of the time.

As you know, there are many markets in steady declines right now, so we’re actually getting very anxious because we feel that that set-up will probably be occurring shortly.

What does it tell you about size? Is there something about those bars that would tell me how much of size to put on with each of these trades?

Well that particular set-up is a set-up that we actually play very sizably. In fact, my traders are instructed to take every single thing in their account and risk it all with the appropriate stop under that two-bar pattern.

We have eight specific events that can happen in the market that are what we call “risk-all events;” that twin tower set-up is one of the eight.

One other key factor that I think is very important, that twin tower set-up must happen under a declining 20-period moving average of the underlying item. We use the 20-period moving average, that set-up occurring deeply under the 20-period moving average, marking the final low.

Again, it’s important that your viewers understand that we’re risking everything on that set-up, but with a tight stop under that two-bar pattern. That tends to produce the low 92% of the time.

NEXT: Best Markets for Finding This Trade Set-up

|pagebreak|

Alright, so at 92% we’re looking for this trade maybe once a year, or does it happen more often?

Actually, yes, good question. It actually happens a lot more frequently than one might think.

It also depends on the time frame. Our income-producing traders might find this multiple times on a five-minute chart if they’re trading in a micro fashion. On the daily chart, it might happen once every several months, and on a weekly chart, maybe once every several years.

Any particular market where this is working even better, maybe 94%, 95% of the time?

We’ve played it quite successfully in silver and gold over the past year. It has happened six times over the past year in both of those markets and it’s been quite nice.

You had a very specific place you said to put that stop; can you repeat what that is?

There’s an elongated red bar on your daily chart followed by an even taller or longer green bar that takes out the high. We buy into the green bar above the high of the red bar with a stop under the green bar’s low, so the bar that you’re buying, use the low as a reference point for your protective stop.

So in essence, that strategy ensures that whenever it fails, you’re going to lose only one bar, the bar that you bought.

When it wins, you might win 48 bars, or 22 bars, or 18 bars, but every loss will only be one bar. Now isn’t that quite novel? What if traders promised themselves to only lose one bar on any given trade they take? I bet you they’d have dramatically different results.

No question, and then how about a profit target? Anywhere that you’re looking above that to take profits?

Well what we’re doing, once we’re in that play, remember we’re entering that play under the item’s or the stock’s 20-period moving average. Once we’re in, it tends to move above the 20-period moving average, at which point we will use that moving average as a trailing stop.

So as long as the stock is trending, moving powerfully to the upside above that 20-period moving average, we hold on to the play and the 20-period moving average stop will be our guide for when to sell.

Related Reading: