Gold looks a chance of a minor double bottom formation at the moment. It also looks a situation where Bollinger Bands could provide a set up for early entry.
Bollinger Bands on 4 hour gold chart
Regular readers will be familiar with this set up. It involves the first trough in the “W” or double bottom pattern being under the lower Bollinger Band but the 2nd one being above it. This suggests strong downward momentum at first but declining momentum to follow. Traders using this set up are prepared to buy as soon as this happens and not wait for the break out of the double bottom pattern.
It’s also possible that price drifts a little lower before confirming the second low in the “W”. In this case the Bollinger Bands help identify a double bottom that is not so obvious just eyeballing the chart. Even though, the 2nd low may be a bit lower (or in other cases a bit higher) than the first one , the declining momentum indicates potential reversal behavior even if the pattern doesn’t look like a text book double bottom.
When to buy
Traders will often build strategies around entering as soon as a set up as completed. They might then assess whether the strategy can be improved by waiting for confirmation or a bit more certainty. Is the slightly later entry justified over time by fewer losses from false starts?
Time management and convenience can be another consideration here. Is there a logical place to position stop entry orders without having to be glued to the screen 24 hours a day?
There are various alternatives here but one could be to use the middle band or 20 period moving average as potential confirmation a new uptrend has started. A stop buy order could be positioned just above it.
A more sensitive strategy might be to buy on the first close or even move above the high of the candle that’s low potentially forms the 2nd trough in the W. When that high is taken out the short term trend can be said to have changed with individual candles now making both higher lows and higher highs.