Traders and investors often try to “pick the bottom,” thinking they are getting a great price.
What is a Bottoming Pattern?
Master Trader defines it as anything in a downtrend that has broken its downtrend by failing to make lower lows or lower highs or showing signs of bottoming through consolidation or other bullish price action.
Most are traps to the uneducated trying to “pick bottoms” and buy cheap.
Candlestick Price Patterns
At Master Trader, we have several criteria to define quality setups based on the structure of the price pattern using Master Trader Strategies (MTS).
The Structure of the price pattern will speak to us about the relationship between buyers (demand) and sellers (supply) and the likelihood of reversals and trend continuation.
Having “something extra” (i.e., an Event) to suggest that the bottoming action is over and ready for an uptrend
Master Trader teaches that EVENTS (e.g., Shakeout, Gap Reversal, Bullish Wide Range Bar (+WRB) on +Vol.) combined with simple technical analysis concepts increases the odds of a successful Swing or Day Trade in all tradeable instruments.
As with all trade setups, we need a Price Void on the time frame being traded, meaning there is insignificant resistance to the left for longs.
A Void can be a rapid momentum move or an unfilled gap are where there are little to no price pivots of congestion.
Below is a Daily Candlestick Chart of Renewable Energy Group, Inc. (REGI):
Master Trader uses these three moving averages (MA) on daily charts to visually show the short-, medium- and long-term trends.
Master Trader Key Concept – Moving Averages are Guides that can speed up the analysis process; price tells us what points are tradable.
Read the Price Action of REGI Using Master Trader Strategies (MTS)
At the February high, the 20-MA (blue), 50-MA (green), and 200-MA (red) were all up-trending.
Master Trader Key Concept – The slope of a moving average is an indication of trend strength.
From February high to the present, REGI is in a short- and medium-term downtrend, but within the context of a longer-term uptrend.
Notice, however, how the slope of the 20-MA (blue) has been flattening out.
What does that suggest? Remember that the 20-day moving average is created by simply taking the closing price of the last 20 days and dividing it by 20.
Thus, it is showing us that the selling pressure is easing with the buyers and sellers being in greater agreement of fair value (supply and demand), as opposed to the clear lower lows and lower highs that preceded it.
In other words, buyers are beginning to take control and REGI is Bottoming.
Master Trader Key Concept – Converging moving averages point to inflection points.
If a decrease in volatility brought moving averages together, an increase should be at hand. With a compelling pattern, the typical next move is in the direction of the longer trend.
Notice in REGI that the candlesticks are tightening between the flat 20-MA and rising 200-MA.
The candlesticks and moving averages are suggesting that the expected turn (i.e., downtrend to sideways to up) on the smaller time frame (20-MA) is in alignment with the longer uptrend (rising 200-MA)
Master Trader Tip: Bottoming patterns or Turns on a smaller time frame are often great entries when there is a Setup and alignment in a larger time frame.
As you can see in REGI, there has been bullish price action developing over the past three weeks.
A Special Event on the chart is the break to a new low under the 200-MA (Red MA) and snap back to create a Bottom Tail Candle.
Master Trader Tip: That price action tells us that buyers are lurking below ready to pick up shares
The pickup in volume on the most recent candlestick (a bullish engulfing reversal bar) is positive since it occurred at a reversal.
As more shares exchanged hands and it the cancel closed positive (above the opening price and prior close) the signs of accumulation at these levels are clear.
The entry is over the last candlestick’s high, with a protective stop under the preceding red candle’s low.
To learn how to objectively interpret price patterns and trade anything that moves, regardless of your current level of knowledge, you need Master Trader Strategies (MTS).
To learn more about this very important topic of Candlestick Bottom Patterns which can make — and save you — a lot of money, watch the Full Lesson
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Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
