The Bottom Fishing Trading Method

The Bottom Fishing method is geared toward the long side of a trade. It
works best when the longer-term trend is up, meaning that it can work
exceptionally well after pullbacks or major corrections.

A Note on Stop Losses When Bottom Fishing

When bottom fishing, we’re looking for a certain type of Double Bottom.
 If you place your stop loss below the first bottom, you’re likely to
sustain a deeper loss (so you compensate by taking on a smaller
position size depending on you % risk). But your return rate may
also be greater.
 If you place your stop loss below the second bottom (a higher level),
your likelihood of getting stopped out may be greater and your
performance numbers may not be as profitable as it might be with a
deeper stop loss.
The Rationale
The rationale behind bottom fishing is that the lows in a declining market
are failing to break lower. The second “retest” of the low is failing to match
the level of the first swing low. So, you end up with a W in which the
second low is higher. What it means is that sellers are beginning to drop
out, and buyers may be entering the market, possibly reversing the trend.
A quick snapshot of what you’re looking for:
That’s the model. Here’s what it looks like in the live market. Note how
reality can vary from the model. This example in the GBPJPY took several
days between lows.

GPBJPY Daily August 15 to December 20, 2019

In the AUDCAD, the second low wasn’t very pronounced, and it falls
between the categories of a V and W bottom. However, the second low
gives you enough room to justify a trade setup.

AUDCAD Daily January to June 2020

CNYUSD Daily August 2019 to January 2020

The CNYUSD isn’t a very liquid currency pair to trade. But if you’ve been
following the US-China trade tensions, the fundamentals might have given
you enough confidence to trade this pattern. The technical setup would’ve
made for a nice tactical setup.
Now that you know what to look for, the next thing you probably want to
know is how to trade.

Setting Up Your Bottom Fishing Entry

Step 1: Find an ugly double bottom
We just covered a bunch of them. Let’s use our first example.
Ugly enough? We see one bottom followed by a second. In real-market
cases, the bottoms can be closer or further apart. It doesn’t really matter,
as long as you can identify two bottoms. The next part is critical with
regard to this particular setup.
Step 2: The Second Bottom is Higher than the First
For the sake of the setup, we’re looking for a second bottom that’s 5% to
around 20% than the first. Although the best test results come from this
range, in some cases, the second high maybe even greater than 20%. You
have to determine this using your own judgment–whether the reward is
worth the risk.
What we’re looking for in this second low is an indication that selling
pressure is being canceled out (or overpowered) by buying pressure.
Step 3: Calculate the height of the chart and determine your price
target
 The first low [A], is the bottom of the pattern.
 The high after the first low [C], is the top of the pattern.
 The second low [B] indicates that buying pressure is more prevalent
than selling pressure; it also serves as an alternate stop loss (for
those that choose this level for a stop).
Calculate the height between A to C. You have to decide the multiple of
this height (75%, 100%, or more) based on the technical or fundamental
factors you see before you (resistance ahead, fundamental conditions,
etc.) in order to decide which multiple you want to use. In other words,
you have to use your discretion to customize your target.
Add your preferred multiple to C to get your price target for the
completion of this candlestick pattern.
Step 4: Place your entry order, take-profit order, and stop-loss
 Trade entry should take place once the price action has closed
above [C].
 Once you’ve entered your position, place an order to sell at your
target.
 Place a stop loss at the bottom of your pattern [A].
 Alternatively, you can place a stop loss below [B], but be aware you
may be stopped out more frequently than if you were to place a
stop below [A] which, if violated, cancels out the pattern.

Step 5: Complete the Trade

The last part is pretty easy. Allow your trade to complete itself at a profit
or loss. Hopefully, you’re allocated the right percentage of risk to your
position, not more or less. If your target is 100% or more the height of the
pattern, then you can consider either raising your stop loss to [B], or close
to a breakeven point to limit your losses. At this point, you’re on your own,
but at least you have several options for managing your trade.
Let’s look at this trade from a real market scenario, using some of our
examples above.
Example – GBP/JPY Trade

The height of the pattern between [A] and [C] = 9.10 (or 910 pips). You
would add this to the top of the pattern at [C], or 135.74, to get a target of
144.85.
You enter a long position at the close of the breakout candle at 137.11.
Since your target is 100% of the pattern height, you exit your trade at
144.85 for a profit of 7.74 to 774 pips.

Example – AUDCAD Trade

Similar to the example above, you enter the trade at the close of the
breakout candle at 0.8718. You exit at 100% of the pattern at 0.9315 for a
profit of 597 pips.

Example – CNYUSD Trade

By now, you probably get the picture.

The Bottom Line

Bottom fishing trading is essentially an attempt to time the market. And
one thing that’s certain is that most traders and investors are unsuccessful
timing the markets. But what matters is not necessarily your win rate, but
that your positive payoffs are greater than your losses. In other words,
you can lose several times but make back your losses and hopefully more
on fewer wins. And although there are many different ways to ‘bottom
fish,” this technique is one sound way to keep your setup objective,
measurable, and flexible enough for adjustment, should the situation
(technical or fundamental) call for it.