This intraday double bottom trading strategy is a powerful bullish reversal strategy that captures the low before the stock rises. The double bottom is a bullish reversal chart pattern that appears quite frequently in many different time frames. Day traders can also take advantage of this chart pattern and find trading candidates.
The diagram above is how the ideal double bottom looks like. We want to be on the lookout for stocks that make this pattern in the intraday charts. Everyday, there will be at least one trading candidate that makes the 5 min double bottom. If you look for it hard enough there is always a stock that does this pattern some time during the day.
How does the double bottom look like?
Well, it looks exactly like a "W" alphabet.
The way that we should trade the double bottom is different from what most textbooks teaches us. If you follow the traditional entry points, you might be quite late to enter the stock. Especially when it is a 5 min double bottom, the gains may have a certain limit because of intraday resistance points.
Therefore, below is a template of how to enter the stock depending on how aggressive you are.
There is always a pro and con to aggressive and conservative entry points. If you are aggressive, you tend to get more rewards but you might get stopped out more often. If you choose to be conservative, you tend to have smaller rewards but your accuracy will increase because of more confirmation.
The diagram above shows the different ways to enter the 5 min double bottom.
First Entry Point
The first entry point is when the trader suspects that a double bottom might be forming. There should be a first low and then a bounce up and correction back to the area of the first low. At this point, the trader does not know yet if a second low will be forming.
A good trader will be able to anticipate if a double bottom might be forming based on where the pattern is forming. For example, if the stock is trading near support area or it is sitting at the powerful 5 min 200 MA, then there is a big possibility that a second low is forming.
The moment the stock forms a second low and goes up a bit, the trader enters the stock for a very aggressive entry point. This can often give the trader a very very good reward to risk ratio. Often times it can be anywhere between 2-5 reward to risk ratio. Sometimes it can be even more.
The downside to this aggressive entry point is you might get stopped out. Especially if the trading day is volatile, you might see the stock hit your stop loss and then move back up higher.
Second Entry Point
The second entry point is less aggressive but still yields a good reward to risk ratio. It comes with an added layer of confirmation as we only enter when the stock breaks a downtrendline. The moment of entry is when the stock trades above the downtrendline.
The Third Entry Point
The third entry point is the least aggressive. We only enter the double bottom when it trades above the middle of the"W". It may be less aggressive but it still can capture quite a big chunk of the upwards move.
The chart above shows how AMZN had a nice 5 min double bottom.
The above example shows how a trader could have played the double bottom like a master. Notice how the stock made a first low and then a second low. As the second low was forming, a doji appeared to show that momentum to the downside is slowing down.
The aggressive trader could have bought AMZN once it trades above the doji. That will be entry 1. A less aggressive trader could buy the stock when it broke a downtrendline. That is a better entry because it has more confirmation with the stock breaking a downtrendline. That is entry 2.
For the conservative trader, he or she can choose entry 3 where they enter when the stock goes above the highs of the middle "W". That is also where AMZN went above the 5 min 20 MA.
All 3 entries are successful the only difference being the reward to risk is much bigger with the aggressive entry.
If you know how to enter a stock, you also need to know when to exit it in case the trade does not work out. Not all double bottoms will work. That is why trade management is so important.
If you have a stop loss, you will limit the amount of losses if the trade does not work out. You never know how low a stock can go, so its always good to have a stop loss especially in day trading.
I think the above ways to put a stop loss is self explanatory. Just make sure you enforce it and don't try to move your stop loss.
In the event that the trade works, it will move up a lot to give the trader a very good profit.
I'm going to teach you a few ways to take profits. Here are some examples:
As you trade this pattern more and more, you will come up with the correct combination of how much to sell and when to sell. Some traders like to take all profits off the table when a resistance area or target is met. Some like to take 1/3 off here, 1/3 off there and let the remaining 1/3 go higher.
One of the things with trading is always to look for convergence of technical concepts. If you see a double bottom, where and when it happens will have a big impact on the probability of success of the double bottom.
From my experience, I notice that double bottoms work very well when:
If you take a look at the chart of AMZN above, you can see how the double bottom happened at the 5 min 200 MA. The 5 min 200 MA is a very powerful psychological support area. Not only in the 5 min chart but also in most timeframes which include the 60 min and daily charts.
Therefore, if you see a double bottom happen at the 200 MA, the odds of success increases dramatically.
Take a look at the diagram above. It shows a double bottom with an indicator which diverge from it. What divergence means is price will be making lower lows or same lows but the indicator (like stochastics) will be making a higher low.
The presence of a divergence between price and indicator shows that there is internal strength. Therefore, it will give the trader more confidence that the double bottom will work.
Congratulations in learning about another trading strategy. This is a simple yet powerful trading strategy. The 5 min double bottom trading strategy is simple but it takes a lot of experience to be able to execute them very well. After all it is a 5 min chart where things can happen quite fast. But if you manage to master this pattern, it will give you another way to profit from the stock market.
Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com
Charts with the investing.com logo are courtesy of Investing.com powered by Trading View
Mar 23, 21 08:25 AM
This week let us take a look at the SPX and TSLA. See what we can learn from their charts.
Mar 19, 21 05:24 AM
In this week we will have a look at Bitcoin, ETN and MAT, SPX and QQQ and see what we can learn from its chart.
Mar 09, 21 08:33 AM
In this week's lesson, let's take a look at bitcoin and makita.
Mar 03, 21 09:48 AM
In this week we will take a look at BRX and KIM and see what we can learn from the charts.
Feb 25, 21 07:54 AM
In this week we will have a look at VUZI, KSS, PBCT, CBRE, SPG, KPOWER and the lessons from their chart.