In the world of Technical Analysis, traders are always on the lookout for patterns that can give them an edge in the financial markets.
One such pattern that has gained popularity over the years is the “Adam and Eve chart pattern.” This unique pattern can be a powerful tool in a trader’s arsenal when used correctly. In this comprehensive guide, we will delve into the details of the Adam and Eve chart pattern, its characteristics, how to identify it, and most importantly, how to trade it for maximum profit.
1. What is the Adam and Eve Chart Pattern?
The Adam and Eve chart pattern is a technical analysis pattern that is used to identify potential reversals in the price of an asset. This pattern is named after the biblical figures, Adam and Eve, because of its distinctive shape, which resembles two rounded bottoms, one smaller and sharper (Adam), followed by a larger and smoother one (Eve).
The Adam and Eve pattern typically occurs after a prolonged downtrend and signals a potential bullish reversal. Traders often look for this pattern as it can offer a low-risk entry point for long positions.
Adam and Eve Chart Pattern has its special place when it comes to the short -term bullish reversal chart patterns.
The Adam and Eve chart pattern is a double bottom pattern, but it differs slightly from the classic double bottom pattern that we discussed in one of our previous articles.
Table of Contents
- 1. What is the Adam and Eve Chart Pattern?
- 2. Characteristics of the Adam and Eve Pattern
- 3. How to identify the Adam and Eve Chart Pattern?
- 4. Psychology Behind Adam and Eve Chart pattern
- 5. How to trade the Adam and Eve double bottom pattern?
- 6. Real-Life Examples and Statistics
- 7. Best Tips For Trading Adam and Eve
2. Characteristics of the Adam and Eve Pattern
- Shape: As mentioned earlier, the Adam and Eve pattern consists of two distinct bottoms. The “Adam” bottom is sharp and V-shaped, while the “Eve” bottom is rounder and broader.
- Volume: The pattern is often accompanied by declining trading volume during the formation of the two bottoms. This decline in volume indicates a lack of selling pressure.
- Timeframe: The pattern can form over a period of weeks to months, depending on the timeframe of the chart being analyzed.
The formation of the Adam and Eve chart pattern is unique in that it has two bottoms, one narrow and V-shaped and the other wide and somewhat flat or rounded.
In a bearish market, the Adam and Eve chart pattern has a very high win rate; when traded according to the guidelines outlined in the following sections, you can expect a profit probability of 65% to 70% and an average return of 33%.
Now that we have a basic understanding of what the Adam and Eve chart pattern is, let’s move on to how to identify it.
3. How to identify the Adam and Eve Chart Pattern?
The first step in profiting from the Adam and Eve double bottom chart pattern is identifying it at the right time with no flaws.
Because the pattern consists of two bottoms, we will now go over the visual details of each one separately –
A sharp downward spike in a downward trend causes prices to test previous lows or attempt to make new lows, forming an Adam bottom. This spike can also occur in an uptrend, but since we are talking about double bottoms, we will ignore the uptrend.
If there are two spikes placed back-to-back, the Adam bottom can still be used, but it should be noted that the height of the second spike should be less than half that of the first.
The first and most important condition for a second bottom to be qualified as an Eve bottom is price congestion in a wide range, as opposed to a V-shaped Adam bottom.
The second requirement is the spikes’ shape, which is wider and rounder in the bottom of Eve.
Once both bottoms have been correctly identified, we will proceed to the details of the overall characteristics of the Adam and Eve Pattern using the key points listed below. –
- Prior Price Trend should be downtrend, strength and time period of bearish trend do not matter however strong downtrend definitely adds up to % of returns.
- Price Rise If the price rise between two bottoms is greater than 10%, the overall probability of profit increases, and tall patterns perform well.
- Volume If the volume bar on Adam bottom is tall, it indicates that the overall Adam and Eve pattern is valid; volume decreases from Adam bottom to Eve bottom.
- RSI If you like trading divergences, look for one in the case of the Adam and Eve pattern. If there is a sign of bullish divergence, it adds to the overall credibility of the pattern.
Finally, the most important rule for identifying a valid Adam and Eve chart pattern is to wait for confirmation of a breakout above the pattern’s highest high; only then is the pattern said to be valid; otherwise, the price will continue to fall in the direction of the major trend in 70% of the cases.
4. Psychology Behind Adam and Eve Chart pattern
Why does the Adam and Eve pattern work?
When it comes to trading, there is no magic spell; any chart pattern works because of market psychology.
When prices fall, market sentiment is bearish, and prices make a new low marked by an Adam bottom with high volume.
When bears are unable to push prices lower, Adam’s bottom serves as an important immediate support level.
After several weeks, prices come close to this support level and halt, indicating that any move below the support level will act as a breakout from the structure and bearish trend continuation.
If market participants are unable to break this level on the second attempt, this provides an opportunity for those who want to buy bottom in anticipation of a bullish reversal and thus higher prices.
5. How to trade the Adam and Eve double bottom pattern?
The following are step-by-step trading instructions for the Adam and Eve pattern:
- First and foremost, use the identification guidelines provided in the previous section to identify the valid pattern.
- Once a valid pattern has been identified, draw a confirmation line by connecting the highest highs of two bottoms.
- Wait for the breakout above the confirmation line.
- Enter 50% of the quantity at the breakout and the remaining 50% on the retest of the confirmation line; if the retest does not occur, only add 25% on the first retracement.
- The pattern’s target can be the height of bottoms imposed upwards.
- To account for volatility, set the stop loss 1 ATR below the confirmation line.
- More experienced traders can profit from the failed Adam and Eve pattern by reversing the long position and taking a short position to profit from the bearish continuation.
The gap opening above the confirmation line should be interpreted as a positive signal and traded using the methodology described above.
6. Real-Life Examples and Statistics
EXAMPLE: Currency Pair EUR/USD
On the daily chart of the EUR/USD currency pair, an Adam and Eve pattern emerged in OCT 2022. The breakout above the confirmation line occurred with a noticeable volume spike.
- Entry Point: 1.0054
- Stop Loss: 0.9710
- Take Profit: 1.0926
- Risk-Reward Ratio: 1: 2.5
This trade provided a 800-pip profit, demonstrating that the Adam and Eve pattern can be applied to various financial markets.
7. Best Tips For Trading Adam and Eve
Now that you’re familiar with the Adam and Eve chart pattern, allow me to share some expert advice from my own trading experience using technical analysis tools –
- Never let the “jumping the gun” error cost you a trading opportunity; sometimes it takes a lot of patience to allow the pattern to fully unfold before placing an entry; don’t rush.
- A failed Adam and Eve pattern is an excellent opportunity to trade with the trend; if prices break below the Eve bottom, place a short entry and ride the trend.
- Because we use the height of the bottoms as potential profits in our methodology, tall patterns mean more profit. Taller patterns indicate good risk-reward trades.
- To increase the likelihood of profit, use only two indicators: volume and RSI.
- The volume indicator will alert you to a drop in volume from Adam to Eve, which is a good sign.
- The RSI indicator should be used to find bullish divergence; if there is none, no problem, but if there is, use it to increase position size.
Even though Adam and Eve is regarded as a profitable stock chart pattern, I have discovered that most traders find it difficult to convert the opportunities offered by these chart patterns into profits. The main cause of this issue is a lack of psychological discipline.
This pattern is difficult to trade because there are so many psychological and performance errors that can occur while trading it.
When I look back at my own trades, I sometimes feel like I could have done a much better job, which is why I would advise you to paper trade and practice as much as possible before entering trades with the Adam and Eve chart pattern.
By practicing some paper trades and easing into pattern identification and trading guidelines, performance and returns can be significantly improved.Author is Senior Technical Analyst
At Bulls Arena Trading
Is the Adam and Eve pattern bullish?
The Adam and Eve pattern is a short-term bullish reversal pattern that indicates the end of a bearish trend.
What is Adam and Eve double bottom pattern?
Adam and Eve double bottom pattern is a type of double bottom pattern in which one bottom has a narrow V shape spike and the other bottom is wide and rounded.
Is Adam and Eve a reversal pattern?
Yes, Adam and Eve may signal the end of a downward trend (if everything goes as planned).
What is Adam and Eve bottom?
Adam is a narrow V-shaped spike, whereas Eve’s base is round and wide.
What is Adam and Eve pattern’s success rate?
Almost 70% if all conditions (discussed in article) are met.
Note: Always conduct thorough research and consider seeking advice from financial professionals before making any investment decisions. This article is for educational purposes only and should not be construed as financial advice.