REAL WORLD
Profiting From Fear-Based Selloffs
The V-Bottom Buy Setup
While at least 90% of trades should be taken in the direction of the trend, there are also opportunities to enter and profit from countertrend trades. Here’s one setup you can take advantage of.
This article could also be jokingly titled “How To Properly Catch A Falling Knife.” While at least 90% of trades should be taken in the direction of the trend, there are occasionally legitimate opportunities to enter and profit from countertrend trades. The V-bottom climactic selloff is one. Ideally, you would want to be short when these climactic selloffs occur, but you rarely are, as they seem to come out of nowhere and for no reason.
As an example, let me show you a five-minute chart for daytrading. It is effective on most time frames and is particularly effective for swing trades using a daily chart. Try to stay away from the whippy one- and two-minute charts when using this technique, as there will be many false setups on these micro time frames.
Power trend or selloff?
First of all, it is important to differentiate between a power trend down and the fear-based selloff (Figure 1). The selloff has at least five consecutive red bars down. The bars also gain in size toward the end of the move as volume increases. The bars also resemble a vertical drop similar to a waterfall and show significant separation from the moving averages. Look at the distance from the moving averages in Figure 1 and the near-vertical fall of the bars.
Figure 1: power trend or selloff? A climactic selloff has at least five consecutive red bars down. The bars also gain in size toward the end of the move as volume increases. The bars also resemble a vertical drop similar to a waterfall and show significant separation from the moving averages.