Master The Double Bottom + RSI Divergence Trading Strategy (Full Course)
Published: 2021-01-29
Status:
Available
|
Analyzed
Published: 2021-01-29
Status:
Available
|
Analyzed
Predictions from this Video
Incorrect: 0
Prediction
Topic
Status
The speaker will teach an entire trading strategy in under three minutes.
"I'm confident it will reach $130,000 by 2025."
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The speaker will explain a trading strategy based on double bottoms with divergence, outlining the C.E.S.T. process (Conditions, Entries, Stops, Targets).
"We're going to get started right now now double bottoms with divergence is just an entry reason it's not actually a trading strategy so we have to do the process i call c-e-s-t"
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The first condition for the trading strategy is identifying a major level of structure on a higher timeframe.
"my first condition is that i must see a market that is at a major level of structure on a higher time frame"
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For day trading, the four-hour chart will be used as the higher timeframe to identify structure, with trading occurring on the one-hour chart.
"my higher time frame is the four hour chart because i'm planning to trade only one hour chart"
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Once a major structure level is identified on the four-hour chart, it will be marked with a green box.
"once i find my major level structure on a four-hour chart i place a green box at that major level of structure"
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After identifying structure on the higher timeframe, the trader will move to a smaller timeframe (e.g., one-hour) to look for a double bottom as the second condition.
"i drop down to a smaller time frame in this case it's gonna be a one hour chart on this one hour chart i start to look for my second condition which is i must see a double bottom"
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After identifying a double bottom, the trader will check the RSI indicator for divergence as the next condition.
"i then look down at the rsi indicator i will explain the rules for a double bottom and the rules for divergence after this but right now i'm doing the quick version of it so i'm looking for divergence on the rsi after i get a double bottom"
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A green candle following a double bottom with divergence will serve as the entry signal.
"and a green candle that green candle is my entry"
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The stop loss for the trade will be set 1 ATR below the swing low of the first bottom of the double bottom, which is calculated to be 20 pips in the example.
"after entry i have one atr below the swing low of the first low of the double bottom the atr currently is 12 pips 12 plus down to that twin low is eight is going to be a 20 pip stop loss"
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The target for the trade will be set to achieve a 1.4 to 1 reward-to-risk ratio.
"after that 20 pip stop loss i personally like to get about a one point four to one reward risk on my trades"
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Major structure levels on higher timeframes can be identified by looking at previous broken levels of resistance or support in a trend.
"the way i like to find major levels of structure on my higher time frames there are two different ways the first way is by looking at the previous level of resistance or support that was broken in a trend"
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Another method for identifying major structure levels is to look for areas that have been tested multiple times by the market for support or resistance.
"the second way is by looking for levels that have been tested and used multiple times by a market for resistance or support"
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For a short trade (implied by 'red box'), the conditions are: market pulls back to the identified resistance level, a double top forms, divergence on RSI is present, and a red candle appears for entry.
"i'm waiting for the cat twist to either pull back to this red box if the market does pull back to that red box another condition i need to see is a double top another condition is that double top must have divergence on the rsi and then you'd be looking for a red candle for entry"
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For a long trade (implied by 'green box'), the conditions are: market enters the support zone, a double bottom forms, divergence on RSI is present, and a green candle appears as the buy signal.
"my conditions are when the cat twist gets into my green box i then wait condition number two for a double bottom condition number three that double bottom must have divergence condition number four that divergence must be followed by a green candle that is my buy signal"
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This strategy is primarily a day trading approach, utilizing the four-hour chart for higher timeframe analysis and the one-hour and fifteen-minute charts for trade execution.
"i'm using this like a day trading strategy so i'm trading on the one hour and the 15 minute therefore my higher time frame is the four hour"
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If day trading on the five-minute chart, the one-hour chart should be used for identifying major structure levels.
"if you're gonna be day trading on the five minute chart use the one hour for your major levels of structure"
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For swing trading on the four-hour chart, the daily chart should be used to identify major structure levels.
"if you're swing trading on the four hour use the daily super easy concept to understand"
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When identifying a double bottom, a box is drawn encompassing the bodies and wicks of the candles of the first bottom.
"what i'm doing when looking for double bottoms is once i have my first bottom let's say the market is right here i do nothing more than put a box between the bodies of the candles and the wick of the candles on that first bottom"
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A valid double bottom setup requires the second bottom's wick to touch or exceed the box created from the first bottom. A full candle body closing below the box invalidates the setup, indicating trend continuation.
"what i want to see is a candle that at least touches the top of that box the candle can close inside that box a wick can go past that box what i do not want to see is a full body of a candle close below that box in that case i'm seeing train continuation i don't want to place that trade"
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A double bottom is confirmed if a wick touches the top of the box drawn around the first bottom's candles.
"we have a double bottom now that was a question i know i said it like a statement do we have a double bottom here yes we have a wick that touches the top of the box that i've created"
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The entry signal for a long trade is a green candle that appears after a double bottom with RSI divergence.
"we have divergence on the rsi with our double bottom and that green candle itself would be the entry candle"
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A 20-pip stop loss is used, with targets set to achieve a 1.4:1 reward-to-risk ratio.
"i think we had a 20 pip stop loss and your targets you can put wherever you would like i personally like trading with a 1.4 to 1 reward to risk"
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On the Pound Aussie, a major structure level was identified on the 4-hour chart, prompting a move to the 1-hour and 15-minute charts to look for divergence and double bottom opportunities.
"here on the pound aussie we have a major level of structure looking left on the four hour chart since that is the case i'm going to drop down to the one hour and the 15 minute chart to start looking for divergence and possible double bottom trades in this major level of structure"
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On the 15-minute chart of the Pound Aussie, clear divergence was observed, with the market pushing lower while the RSI pushed higher.
"on the 15 minute you can see that divergence even more clearly as this market's consistently pushing down the rsi is consistently pushing up"
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The entry for a long trade is confirmed by a green candle appearing at the second bottom of a double bottom pattern, following divergence.
"here's our neckline i wait on this double bottom at the second bottom i need a green candle since that happened here that is my set in stone entry"
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A trade on the Pound Aussie was initiated with a stop loss of approximately 46 pips and a target of approximately 64 pips.
"our stop loss is going to be somewhere near 46 pips and our target is going to be somewhere near 64 pips"
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The Pound Aussie trade setup involved a major structure level on the 4-hour chart, a double bottom with divergence (starting from oversold conditions) on a lower timeframe.
"here's our major area of structure looking left on the four hour chart we have our double bottom right here our double bottom did come with divergence starting oversold creating divergence and we did have a lot of divergence even on the way to this major area of structure"
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The identified major structure level on the 4-hour chart acted as a significant reversal point, initiating a new uptrend in the market.
"this level ended up being a huge reversal point for this market if i click play you'll see what i'm saying this market ended up reversing completely and now starting a brand new uptrend from that level"
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The speaker's preferred trading method involves combining major levels of structure with double bottom/top patterns that exhibit divergence.
"combining those major levels with a double bottom with divergence or the other way around combining major resistance with a double top with divergence is by far my favorite way to trade the double top and double bottom divergence patterns"
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When the market is trending upwards, a double top with divergence can be used as a counter-trend trading strategy, especially when price needs to pull back significantly to reach support levels for double bottom opportunities.
"when you see the market's pushing higher but what if you wanted to place a counter trend trade because the fact of the matter is you'd have to pull back pretty far to get to the level where you could start looking for double bottoms so you're thinking double top you're thinking counter trend"
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To identify a potential short entry using a double top, the first step is to find a major level of resistance on a higher timeframe that has been tested and reacted to multiple times.
"you need to scroll the chart back see if there's a major level of resistance yes i would count this as a major level of resistance it is a level that has been tested multiple times resistance support and not only has it been tested multiple times it also has been reacted to in a major way by this market"
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After identifying a major resistance level, the trader will look for a double top pattern on a lower timeframe and draw a box around the first top's candles.
"i'm doing is dropping down and seeing if i get that double top with divergence so let's move forward here and see what we end up getting we have our first top what do i do if i get my first top i just place a box very very simple here just placing a box at the wick down to the top of the bodies"
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The conditions for a valid double top include a wick touching the bottom of the box or the first top's bodies, and importantly, no full candle body closing above the first top's bodies, though a wick can extend above.
"i need to see a wick at least touch the bottom of my box or the bodies of the first top and i need to make sure that a candle does not close above the bodies of my first stop but a wick can go above the bodies of the first top those are my conditions for a double top"
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A short trade entry is valid if a double top is confirmed, RSI divergence is present (with the first top in the overbought zone), and a red candle appears.
"and i also want to see divergence but i only know if there's divergence after getting a red candle there's my red candle do we have a valid double top yes do we have valid divergence looking on the rsi our first stop is in the overbought scenario and our divergence does exist with that being the case can i enter this trade short yes i can"
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The stop loss for a double top short trade is calculated by adding the ATR (10 pips in this example) to the initial 10-pip stop loss, resulting in a 21-pip stop loss.
"atr above my first stop which is 10 pips right now 10 plus 11 is 21 pips on the stop loss"
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The RSI indicator settings used are a 10-period RSI with upper and lower bands set at 70 and 30, respectively, to increase its responsiveness for this trading strategy.
"the rsi settings that i have are a 10 period rsi so i change it it normally comes with a 14 period i want it to move a little bit faster for this type of trading so i set it to a 10 period rsi the style for the upper band and lower band they're still 70 30"
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The speaker outlines a trading strategy based on double bottoms with divergence, emphasizing the need for conditions, entries, stops, and targets to form a complete strategy.
"we're going to get started right now now double bottoms with divergence is just an entry reason it's not actually a trading strategy so we have to do the process i call c-e-s-t or conditions entries stops and targets in order to make this into a strategy"
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A day trading strategy involves using the 4-hour chart for identifying double bottoms and tops, with divergence considered on smaller timeframes like 1-hour and 15-minute charts.
"because we're starting out on a four hour chart looking for double bottoms and double tops we'll go through that later with divergence on smaller time frames like 1 hour and 15 minute charts"
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Major levels of structure can be identified by looking at previous resistance or support levels that were broken during a trend.
"The first way is by looking at the previous level of resistance or support that was broken in a trend"
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Another method for identifying major levels of structure is by observing price action at levels that have been repeatedly tested for support or resistance.
"The second way is by looking for levels that have been tested and used multiple times by a market for resistance or support"
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For a buy signal using double bottoms, conditions include the price entering a specific zone, forming a double bottom, exhibiting divergence, and being followed by a green candle.
"if we head lower my conditions are when the cat twist gets into my green box i then wait condition number two for a double bottom condition number three that double bottom must have divergence condition number four that divergence must be followed by a green candle that is my buy signal"
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For a sell signal using double tops, conditions include the price pulling back to a specific zone, forming a double top, exhibiting divergence, and being followed by a red candle.
"if the market does pull back to that red box another condition i need to see is a double top another condition is that double top must have divergence on the rsi and then you'd be looking for a red candle for entry"
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The rules for identifying a valid double bottom involve creating a box around the first bottom's wicks and bodies. A subsequent candle touching the top of this box, closing within it, or having a wick extend past it is considered valid. A full candle body closing below the box indicates trend continuation and invalidates the double bottom.
"what I'm doing when looking for double bottoms is once I have my first bottom let's say the market is right here I do nothing more than put a box between the bodies of the candles and the wick of the candles on that first bottom what I want to see is a candle that at least touches the top of that box The candle can close inside that box a wick can go past that box what I do not want to see is a full body of a candle close below that box in that case I'm seeing train continuation"
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The rules for identifying a valid double top involve creating a box around the first top's wicks and bodies. A subsequent candle touching the bottom of this box, or having a wick extend above the bodies of the first top, is considered valid. A full candle body closing above the bodies of the first top invalidates the double top.
"and all I'm doing is waiting to see if we get the conditions met for this double top which are I need to see a wick at least touch the bottom of my box or the bodies of the first top and I need to make sure that a candle does not close above the bodies of my first stop but a wick can go above the bodies of the first top"
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The speaker uses a 10-period RSI for divergence trading, which is faster than the default 14-period RSI. The upper and lower bands remain at the standard 70 and 30 levels.
"the rsi settings that i have are a 10 period rsi so i change it it normally comes with a 14 period I want it to move a little bit faster for this type of trading so i set it to a 10 period rsi the style for the upper band and lower band they're still 70 30"
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A trade based on a double top with divergence at a major resistance level involved a stop loss of approximately 21 pips.
"Double top divergence major area of structure looking left atr above my first stop which is 10 pips right now 10 plus 11 is 21 pips on the stop loss so we have 21 on the stop and one 1.4"
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A specific trade example for a double bottom with divergence involved a stop loss of approximately 46 pips and a target of approximately 64 pips.
"my stop loss is going to be somewhere near 46 pips and our target is going to be somewhere near 64 pips"
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