To trade effectively, you need different tools for different chart patterns. Some techniques are better suited for markets that are already trending higher, and others are designed to enter a potential reversal where the stock changes direction from a downtrend to a new uptrend. The Wanderer Double-B is a tool that we often use to determine both entries and exits. A Double-B top is often our exit sign, but in this lesson, we will focus on the Double-B bottom for a trade entry.
A Double-B is most useful after a stock has been in an extended downtrend. Ideally, the downtrend will have occurred for a long enough period of time that oversold conditions are present, and a bounce is due. The hard part is knowing when that bounce will occur. While the stock is in its downtrend, we want to avoid being in the stock until we have some degree of confidence that it has changed direction from down to up. Rather than buying at some random spot in the midst of a decline and hoping it will reverse higher, we wait for evidence that a reversal occurred and then wait for a successful retest of the initial low. That is where the Double-B, or second bottom, takes place.
For a Double-B entry, we are looking for a bounce that is followed by a second, slightly lower low. The lower low may be intraday, or it might even take a few days. In real time, a lower low might look something like the chart below. In this chart, we removed all moving averages and technical indicators so you can focus just on the bounce, followed by the second lower low.
Once we find a stock that violated a previous low, we want to see it quickly recover back above support. It can take a few days, but if it continues lower, it is still in a downtrend and is not a Double-B candidate. One way to avoid a false Double-B is to avoid setups with sharply falling moving averages at the time of entry. That suggests that for whatever reason, the bulls got interested enough to cause a rally when the price reached that level. Will they show the same enthusiasm the next time the price drops to that level? That is what we aim to find out.
Next, let's explore where to put the stop on a Double-B. The stop is always a few pennies below the second low. That is the price that must hold if the setup is indeed a double bottom. If it is instead a continuation of the downtrend, we want no part of the trade, so we set our stop right at the point that tells us a double bottom is not occurring where we thought it might. A double bottom might look something like the chart below. Remember, sometimes the second low might only last a day, other times the price may remain below the first low for a few days.
On the chart above you see the same pattern as the previous chart—an extended decline, followed by a bounce, followed by a decline to a slightly lower low. Our stop is placed just below the second low as shown.
Next, let's view our ideal entry. We want to enter as soon as the price rallies back above the price level of the first low. That is our initial indication that a trend change took place, and that is where we enter the trade. At this point, the stop should be very close, as it is in the chart below.
For simplicity, we removed our Wanderer Financial indicator since this entry relies on a specific chart level instead of a buy indicator. If you do leave the WFI on, you will notice that the buy signal often prints very close to the entry point. It usually follows by a couple of days. The exact entry will only be obvious with the benefit of hindsight, but it isn't important to nail the entry with exact precision. To review, we look for:
Of course, there are variations of this trade. We often use the Wanderer Financial Indicator to time our entries. But by sticking with these few basic rules, you will find it is effective for entering the earliest stages of a trend reversal. Below are a couple other Double-B setups with the WF indicator added so you can see how the entry (yellow highlight) happens even before the buy signal occurs.
By doing this trade over and over again, you will become proficient at it and will soon find it easy to spot the setup on a chart. You will find some will work perfectly, and some won't work at all. That is simply the nature of trading. There is no system that only produces winners. Although there will be some losers, this technique offers a reward that is usually three times the risk or even better. At a minimum, we want to see a reward-to-risk ratio of 2:1 or better. And for the losers? Stick with your stops so they remain small. Once a trade has gone your way a bit, you can raise the stop accordingly. I like to use the rising 20 or 50-DMA as my trailing stop.
And that's it! My goal was to make it as simple as possible, so that by following just three steps you could reproduce new trades every week. Again, keep in mind that even the best trading systems produce losers as well as winners. That is just part of trading. As long as you follow the concept and stick to your stops, the winners should outweigh the losers, and your account should slowly grow.