Tuesday, November 27, 2007
Anatomy of The Double Bottom Divergence (DBD) Trades
As many of you already know i love trading Double Bottoms Divergences(DBD) but i have never really explained it. So here it is: Hopefully you'll find it useful to your trading.
I am going to be working mainly in the 5 time frame for these examples:
A low of some sort must be in place or have has just been established. Price prints to a low and then start to move higher, therefore printing a actual low.
We need to see a recovery/bounce of some sort: usually they have a very reflexive/tame/weak nature to them. Then we need the bounce to start failing(this is where you roll up your sleeves, rub your hands, your eyes need to be sharpened and mind focused.
We need to see a RETEST(this is the KEY). This retest will setup the entry. The nice thing about buying the retest is that you are buying weakness(instead of strength, this way you avoid top-ticking) and you are buying near a previous low(step 1).
You are buying when many amatures are actually eyeing to be get short.
Note: If you want to play it safe, then wait for a confirmation of a reversal candle(such as: dojis, hammers etc) to get LONG(given step 4 in in place of course) and establish risk/reward parameters to execute the trade. Volume confirmation would be very nice.
And Step Four:
You need to spot the Divergences using RSI and MACD. As price approaches the double bottom territory, you need to keep an eye on the RSI & MACD and see if they are making higher lows as price is setting in a double bottom, that in essence tells you that the second decline is weak and hence "unsustainable" and will most likely reverse back UP!
Please note: On the 1 , 5 and 10 minute time frames, these events happen very quickly (gotta be quick to react) and a trader needs to practice and pattern recognition skills(which comes from seeing the pattern over and over again).
A lot of times, these Double Bottom Divergent(DBD) trades will yield quick small gains. It's up to the trader's discretion to either book profits quickly, ride for a bigger trend, or realize that the stock stalling and looks poised to break the Double Bottom and get out.
Hope you find it useful and good trading.
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