Join Dstockmarket's Community - Daily Market Analysis, Individual Stock Analysis.
The bottoming tail is one of the easiest trading setup to spot. It is very suitable for traders who like to swing trade a stock. You can often catch the bottom of a correction using this pattern and profit from it when the stock goes back up.
I call this the Daily Bottoming Tail Trading Strategy.
The Daily BT Trading Strategy uses the powerful bullish reversal candlestick called the bottoming tail to initiate trades. As the bottoming tail occurs in the daily chart, this trading strategy can be considered a swing trading strategy.
The trade can last for a few days to a few weeks depending on how fast the stock reaches the target area.
Japanese candlesticks are very powerful to show us possible reversal areas.
When we are looking for a trade setup, we are actually looking to play a bullish reversal in the stock. The stock has been falling for at least a few days and when we see a bottoming tail pattern happen in the stock, we then move in to purchase the stock for a swing trade.
The bottoming tail is a very very popular Japanese Candlestick Pattern. If you have been trading for awhile, you would have realized that modern traders and charting system tend to favor the Japanese Candlestick chart because of the powerful visual image it gives the trader.
The bottoming tail is also known as a hammer. Some may even call it a pin bar.
Whatever it is called, the construction of the pattern is the same. Remember the saying "a rose by any other name still smells the same"? Whatever the bottoming tail is called it still give us the same signal. A bullish reversal is likely to happen.
This is what a bottoming tail looks like.
Although they come in different variations, they all still have the same construction. There will be a small body at the top and then a long wick at the bottom. Which is why we call it the bottoming tail. It also looks like a hammer isn't it?
The bottoming tail is a bullish reversal candlestick because the stock has rejected to go lower. At the start of the trading session, the stock goes down and somewhere in the middle or at the end of the day, the stock recovers from the loss and goes back up to close near the open.
This is a bullish sign.
If you combine this pattern with some support resistance analysis and also with some indicators, it can pack a powerful punch to the trade setup.
There is a reason why the bottoming tail is so powerful in giving us an indication of a reversal. If you have some basics about the construction of this candlestick, you will know what has happened during the formation of the bottoming tail candlestick.
Let me just give you a little background on how a bottoming tail is formed.
The image above shows the daily bottoming tail on the left and the intraday movement on the right. The green body on the daily candle shows the open and the close for the day. The tail below the body shows the road that the stock traveled during the entire day. The end of the tail shows the low of the day.
The entire bottoming tail candlestick represents the entire intraday movement which you can see on the right. At the start of the day, the stock experienced a heavy selling. Then the stock bottomed out and started to move higher. By the end of the day, the stock closed higher than it opened.
What seems to be a negative and bearish day ended surprising many people to close higher. It is as if the stock did not want to go down. It wants to go up.
What do you think the whole investing community would feel tomorrow?
Psychologically, it had a really big impact on them. To see your stock lose so much and regain all the losses and even go up by the end of the day makes many people filled with hope. Therefore, many people will be bullish the next day.
Now that you know how powerful emotionally this candlestick pattern is, you will be able to appreciate this bullish reversal pattern even more.
Let's take a look at a live example of how the bottoming tail trading strategy works. The chart below is the daily chart of ATVI.
You can see a very visual bottoming tail on the 12th of June 2017. The stock had a big drop and it continued to go lower the next day. However, by the end of the day, ATVI moved back up and formed a bottoming tail. ATVI bottomed after the appearance of the bottoming tail and then it moved higher for the next few days.
This bottoming tail in ATVI gave swing traders a nice swing trade.
See how powerful the Daily BT Trading Strategy can be? A bonus is you only need to look at end-of-day charts. Meaning, the person who has a day job can still make money in the markets.
In order for a stock to form a valid setup in the Daily BT Trading Strategy, it should fit these criterias:
Let me take some time to explain each one in a little bit more detail.
Stock Should Have Corrected For A Few Days
We want to see the stock go down for a few days. The reason is we want to collect this stock when others are panicking. This is what we call "bottom fishing intelligently". Normally, it is dangerous to catch a stock that is falling down. But the bottoming tail will provide a safe environment for us to enter the stock cheaper.
Stock Should Form A Bottoming Tail Pattern
This is the most important ingredient that you need to have in this trading strategy. After all, the name itself is "The Daily Bottoming Tail Trading Strategy".
As I have explained above, the presence of the bottoming tail gives hope to investors that the stock does not want to go lower.
Thankfully the bottoming tail pattern is very easy to spot. That is why even the amateur can find trades easily using this trading strategy.
The Bottoming Tail Should Be Very Visible
Not just any bottoming tail will do. We want to choose the best. Imagine you are interviewing candidates for a job in your own business. Don't you want to have the best candidate working for you?
That is why you should not simply trade any bottoming tail that you can see in the stock market. You need to find a bottoming tail that is very visible. The tail should be 2-3 times the size of the body. This makes it easy for the whole world to see and participate in the stock's bounce up.
The Color Of The Body Is Not That Important
When you scan for trading candidates, you will come across some bottoming tails that are red and some that are green. The red ones tell us that the stock closed lower than its open. The green one is more bullish because the stock closed higher than its open.
Its better to have a green bottoming tail but this is not always necessary. If you encounter a red bottoming tail, all you need to do is to wait for the stock to trade above the highs of the bottoming tail the next day. It may take more time than a green bottoming tail but you can always set an alarm to alert you.
A Bottoming Tail Accompanied By Heavy Volume Is Good
If you see a bottoming tail with extremely heavy volume, that can often be good news. Sometimes the heavy volume can happen one bar before the bottoming tail appears. What the heavy volume tells us is that the public is getting panic and selling off their shares unreasonably.
They are controlled by their emotions and a huge wave of sell orders come in when the public is scared. The funny thing is the end of the correction often comes when everybody is too bearish. When everyone has sold, there is no one to push the price down anymore. That is when we should enter and take advantage of the situation.
Stock Should Ideally Be Above The Rising 200 MA
The reason why I put in this criteria is because I know from experience that stocks that are above its rising 200 MA tends to move higher over time. This is because the long term trend is up. You should choose your trading candidates from the universe of stocks that are trending higher.
If you see a stock form a bottoming tail and the stock is crashing down in a downtrend, then the bottoming tail might not work very well. That's because a stock in a downtrend tends to go lower with time. This is what we call following the trend. You buy stocks that are in a long term uptrend.
When you buy stocks that form a bottoming tail in a long term uptrend, you are actually buying the short term weakness in long term strength. The stock suffered from short term setbacks but you are buying it because you know long term wise it is healthy.
Stock Should Be At Daily Catalyst Areas
What do I mean by catalyst areas? There are times when it is best to buy stocks and when it is not. There are areas where a stock is likely to bounce up when it touches it.
Some example are:
We do not have the time to go into detail into all these. I have written another special article that deals with this. If you want to increase your trading accuracy you should read it. The 7 Best Times To Buy Stocks For Short Term Trading.
Let me show you an example where all the criterias are lined up very well to give traders a nice trade. The chart above is the daily chart of VIAB.
All in all, this stock was yelling at traders telling them that it was ripe for a nice bounce up. Look how the stock exploded higher the next day and the day after. This provided traders with a nice explosive swing trade.
I have detailed this stock in another article titled How To Spot Day Trading Stocks That Explode Higher Immediately! In the article, I explain more on how to use the smaller time frames to help you enter the stock. A trader should know how to use multiple time frame analysis to enter stocks with precision.
I think by now you would already know how to enter the stock just by looking at the examples above. If not, it is pretty easy.
After the appearance of a bottoming tail in the daily chart, you can enter:
The entry for this trading strategy is very very simple. Which is why it is very suitable for the new trader.
Just enter the stock when it trades above the highs of the bottoming tail. You have to make sure that the stock does not gap up too much otherwise you will be chasing the stock. A slight gap up is alright but let's say if it gaps up by 5% or more, then the gap up will be too much.
There is no foolproof trading strategy in the world.
That is why you still need a stop loss even if the bottoming tail can have a high success rate.
Stop losses help you to control the amount of losses. They help you to limit your losses so that you don't lose more than you intend.
It's as simple as that. So, for example, if the low of the bottoming tail is 30.00, you can just put a stop loss at 29.90.
The chart above is the daily chart of INTU. Notice how the stock had a correction in late September 2017. The stock then formed a bottoming tail pattern with a green body. The bottoming tail also marked the end of the correction.
Traders can buy the stock when it trades above the highs of the green bottoming tail. A stop loss can be put below the low of the bottoming tail.
With every trading strategy, there are pros and cons to it. Which is why its best for the trader to paper trade the trading strategy and see if the pros outweighs the cons for him or her.
The cons that I mention above are typical for most trading strategies. But do not worry. You can increase your trading accuracy and success rate in this strategy by combining the bottoming tail with other technical concepts.
Some people call this combining East with West. Since the bottoming tail is a Japanese Candlestick and other technical concepts like stochastics and trendlines are mostly made popular in the West, this is a fusion which will increase your accuracy.
It takes time to be able to combine the bottoming tail with technical concepts. Lack of knowledge will hinder you from spotting those technical concepts. Which is why its a good idea to start the Trading Course that I have written so that you can have a solid understanding of the different technical analysis tools.
Here are some things to consider to increase your trading accuracy.
Support And Resistance
Support and resistance areas are extremely important in technical analysis as well as trading. If you see the bottoming tail happening at a price support or even an important subjective support like the 50 MA, then the setup has a higher probability of success
Fibonacci Retracement Areas
If the bottoming tail happens at important Fibonacci retracement areas like 38.2, 50.00 or 61.8 then the possibility of a bullish reversal happening is higher.
Oversold Indicators And Buy Signals
If the bottoming tail happens when an indicator is oversold or when it gives a buy signal then you have more weight to support you. Let's say that the stochastics indicator is oversold and curves up to give a buy signal when the bottoming tail appears. This can give you a very high accuracy trade.
Convergence Of Technical Concepts
The summary for this section is this. The more technical concepts happen when the bottoming tail appears, the higher the success rate you will have. When you choose to trade when technical concepts are in sync, you tend to perform better. Which is why it is better to have patience in trading rather then forging ahead every time you see a bottoming tail appear.
Now we come to another very important part of trade management. After you found a bottoming tail and enter into the trade, how do you take profits?
If you don't take profits, your profits might evaporate. Since we are in the business of trading and not investing, you need to respect the area where you should take profits.
Here are some ideas of when to take profits off the table:
Let's take a look at an example above.
The stock JD had a nice run up and then around the middle of June 2017, the stock corrected to its 50 MA. JD formed a nice bottoming tail at its rising 50 MA. The stock was also sitting at the gap up support area. This combination made the trade a high probability trade.
Traders can buy the stock when it traded above the highs of the bottoming tail and then put a stop loss below the low of the candlestick. 2 days later, the stock gap up above a short term downtrendline and proceeded to move higher.
How do you take profits?
First of all, traders can sell the position when the stock reaches the former high. A former high usually acts as a resistance area. Secondly, a doji formed in the stock and this warned traders of a possible reversal. The trader could have taken of his profits the next day before another correction happened.
If you look carefully, the stock actually broke a short term uptrendline as well after it formed a doji. I did not draw it but if you look at it carefully you will be able to spot it.
One gem of advice I can give you is that you do not need to sell everything at once. Traders often scale out of their position. This means that you can sell 1/2 of your position and monitor carefully what happens next. Sometimes the stock will go up even more and give you more profits. Other times, the stock may fall and you can sell the other half as well.
Scaling out of positions is a good way to minimize risk while at the same time giving you an opportunity to maximize your gains.
The powerful trading strategy that you have learned can actually be applied to any stock in the world. As long as there is enough liquidity, you can make money using this strategy.
Below is a Malaysian stock called Formosa Prosonic. Someone actually asked me what stock I was looking at one day. So I gave them this stock with a bottoming tail. The next few days, the stock exploded higher. In Malaysia, you have to very careful of giving stock picks because people might think you are front running the stock, buying it and then recommending it to others.
That is one of the reasons I do not usually recommend stocks to my Malaysian friends. Its easy to front run a stock that lacks liquidity. For stocks that have a big market cap and lots of volume, it is usually difficult to do that.
As you can see from the chart above, Formosa Prosonic corrected to an area of support and formed a bottoming tail. It was also sitting at the rising 20 MA. As the stock was in a daily uptrend, it had a very high probability of going higher.
By now you would know that this stock actually gave a nice Daily Bottoming Tail Trading Strategy setup. Which is why it exploded higher in the next few days to give Malaysian swing traders a nice trade.
Since a stock that is in a nice uptrend tends to go higher, traders could have sold 1/2 of the position and ride the other 1/2 up. That is following the trend intelligently.
This is just one example of how the bottoming tail can be used to make money in a foreign stock. I'm sure everyday there is one stock in this world that will give us a nice trade. All we need to do is to be observant.
You have now learned a simple yet effective swing trading strategy that combines the powerful Japanese Candlestick with Western technical concepts.
Remember, the more technical concepts that appear in a stock, the more powerful the setup will be. From now on, learn to spot bottoming tails as you scroll through the daily charts. You will soon find a great trading candidate.
May you be able to make a living in the stock market using the bottoming tail!
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
Jan 18, 21 10:34 AM
New chart lesson for the 3rd week of January 2021. Hope you can benefit from this.
Jan 04, 21 11:30 AM
In this week's chart lessons, we will have a look at bitcoin and other charts.
Dec 29, 20 07:47 AM
We should continue to be bullish on the S&P 500 as a weekly bottoming tail forms in this uptrend.
Dec 22, 20 09:27 AM
The SPX is still in a nice bullish uptrend, with it staying above the rising 20 MA and 50 MA.
Dec 15, 20 09:53 AM
December 14 2020 will go down in history as one of those moments where 2 sets of electors emerge for swing states in the US Presidential Election.