The “Double Bottom” is perhaps the most popular of all the conventional technical analysis setups. It is in nearly every trading book written dating back almost a century. I Googled the term and found 9,310,000 search results. With all the attention and popularity, everyone must be making a fortune with this trading setup. The problem is this: how many people do you know that make a consistent low risk living trading the Double Bottom? I speak with and to hundreds of thousands of people around the world and I have never met one. The purpose of today’s article is to slightly shift your thinking from a retail Double Bottom thinker to a professional or institution double bottom thinker.
I started out on the institution side of the business, not in the retail education world. What I do is make sure OTA students trade the Double Bottom like an institution, not like a retail trader who learned to trade with conventional technical analysis reading trading books. Let’s look at a recent example of this from the Supply and Demand grid that I produce each day for OTA traders in our exclusive Mastermind Community.
Notice the pivot low on the left side of the chart that is somewhat hard to see. When that low was produced, the trading books tell us to extend a trend line from that low to the right. The next time price comes back to that level, retail traders are expecting a double bottom and place their buy order right at that prior low. The trading books then say to buy if there is either an equal or higher low. The rule for a double bottom is to place a protective sell stop just below that prior pivot low in case the setup doesn’t work which means placing a sell order just below that pivot low. Now, we know that most retail traders read trading books and lose money. So, when price comes back to this level, retail traders will buy like they did in this example. When price then goes through this prior pivot low like it did in this example, retail sell stops are triggered and filled. Who do you think the buyer is that is filling all those sell stops? If you said institutions, you are correct. This is exactly why I placed our demand level for the NASDAQ that day just below that pivot low for OTA traders. If institutions are buying at that level, we want to buy at that level, period. As a trader who has experience trading with and like an institution, I know how novice retail traders think and trade and I know that many of them lose money.
Think about it, people actually handed us sell orders all the way down there, amazing if you think about it. At demand, people hand you sell orders and at supply, they hand you buy orders. This is the beauty of trading. They do this because they are trained to. To complete the thought on Double Bottoms (and Double Tops), I want to make something clear. At OTA, we are only interested in buying below the prior low (and into demand) for the Double Bottom. Conversely, we are only interested in selling short above a prior pivot high (and into supply) for the Double Top. This trade ended up being very profitable for those who took it but the more important benefit is how low risk trading can be when you know how to time the market’s turning points in advance.
Like everything else in the financial world, this game of proper trading and investing is simply a transfer of accounts from the group that doesn’t know what they are doing, into the account of those that do. Just because something is in a book doesn’t mean it’s accurate.
Hope this was helpful, have a great day.