subject: How To Take Full Advantage Of A Broadening Bottom Formation [print this page] Measure Rule Measure Rule
First thing you have to do is to measure how much you are likely to make in the trade. For that you just need to subtract the highest high from the lowest low of the formation; that would give you the formation height. Now you take that and add that value to highest high of the formation to get the target price for the move.
In a bull market, this method will have a great prediction power approximately 60% of the time. The worst is broadening bottoms in a bear market considering a downward breakout. This one is only 31% reliable, almost nothing and for a trade in a stock market I wouldn't even consider taking it.
Buy at the lowest point
After the formation has touched twice the bottom and up trend lines, then wait for it to hit once again the bottom and go long - do not forget to respect the position sizing! If it does go up, maybe it would be good to sell part of the position at the top trend line since it can either make a downturn or a breakout from the formation. And you do not want to cut your profits short.
A good stop
I consider a good stop something around 15% from the trends lines that makes the formation. That way you are protected from shakeouts and also give enough room for the stock to behave a bit erratically before deciding which way to go.
Sell at the high
You can do the opposite of what I described before and go short when the stock hits the top trend line. Still, remember the position sizing for the trade since it will play a major role on this.
Short Stop
The short stop can be pretty much like the one for the long, although I would recommend using 20% in this one.
Further Considerations
Always be careful and pay attention to what the market has to say: DO NOT act on what you think, act on what you see.
How To Take Full Advantage Of A Broadening Bottom Formation
