INVESTMENT EDUCATORS

Free Charting Lesson

In the above chart, we have what is known as a "Double Bottom" pattern. To an alert trader, this particular pattern makes for an easy profit. It is also one of the safest patterns to trade. Let's dissect what is going on here, step by step.

First, we drew a trendline across the tops as soon as two lower highs were made. Typically, in an established trend, a market will bump up against such a line three or four times before reversing.

Next, we analyze the pattern. Focus on the downswing. In this instance, the price was   contracting as it was making its descent.  The size of  bars on the price chart was smaller  than the bars of the previous downswings.  Normally, there will be five "legs" in the downward progression, and then we will see the reversal. It quickly becomes apparent that no new lows are being made at the first leg of the Double Bottom. So, we look for a  counter-trend rally --- and we get one! With it, there is a penetration of the trendline. This is a major piece of information!

What comes next is the clincher that tells you that the trend is changing. Price comes back down and touches the trendline, but is unable to make a closing price beneath it.

Since the pattern spells a reversal in trend, we then look to Stochastics to confirm what we think will happen. Stochastics, which was developed here at Investment Educators by our own George Lane, is a momentum oscillator. Its function is to detect changing velocity in trends. Take a look at the first bottom that the pattern made…the one before the trendline was first penetrated. Look where Stochastics was at the time. Next, look at where the retest of the low was made and observe where Stochastics was at the time of the retest. The second low on Stochastics was higher than the first low on Stochastics, while the price was making equal lows. This is called convergence. Convergence indicates that the momentum has sufficiently changed to predict a reversal in trend. It confirms that the bottom has been made.

On the way up, it quickly becomes apparent that this is a strong, uptrending market. This market is in a hurry to go someplace and we can know this by looking carefully at the size of the "reactions, or "countermoves" that it makes on its way up. They are very small and short-lived. This indicates the aggressiveness of the bulls.

Catching a strong trend like the one shown is what traders live for. They don't come like that every day, so we like to stay in them as long as possible. To accomplish this, there are methods available that will assist us in determining how far a market can go in one direction before correcting again. Elliott Wave is one method that can do this with awe-inspiring accuracy, so we teach it along with Stochastics in our 2-Day Seminar!

We hope you have enjoyed this lesson. Good luck and good  trading!

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