This trading strategy takes advantage of two technical occurrences. The 200 day moving average support and the double bottom chart pattern.
The 200 day moving average is a support that can often stop a stock from dropping.
The double bottom chart pattern is a bullish reversal chart pattern.
So when you have 2 good technical situations, then there is a high probability of the stock going up.
In order to find a stock that is suitable for this trading strategy, you need to have the stock fit certain criterias. We will be using the daily stock chart. Since we are employing the daily 200 MA, we will need to use the daily stock chart.
The 200 MA is powerful because it is often watch by many traders and investors. Therefore, when a stock drops to the 200 MA, it can often be a powerful support area.
The criteria for this trading strategy:
How to enter this trading strategy:
The height of the chart pattern can be used as a profit target. You can project the height upwards to get a target.
The chart above shows how the Double Bottom At 200 MA Trading Strategy works.
MCK formed a double bottom at the rising 200 MA.
When a stock forms a double bottom at a rising 200 MA, this gives a powerful signal. A rising 200 MA shows us that the long term trend is up and therefore the stock is likely to continue to move higher in the long term.
MCK also had a divergence in its stochastics.
Often, a good double bottom will have divergence between its price and an indicator. In this case, I showed the stochastics. Notice how the stochastics was significantly higher than the price.
The second right was a bit higher than the first right but you could see they are almost at the same level. But the stochastics was much more higher at the second bottom.
This tells traders that the stock had internal strength as it formed the double bottom.
This trading strategy is simple to spot as you need a 200 MA and a double bottom chart pattern. However, it might not appear that often as you need to satisfy this two criteria.
But if you find a stock making this pattern, you can be certain that it can be a high probability trade.
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