Double Bottom Chart Pattern Strategy
This trading strategy tutorial is designed to teach you how to trade the double top chart pattern strategy. The double bottom reversal pattern, not to be confused with the triple bottom pattern or triple top pattern, is similar to the double top pattern, but the only difference is that it develops at the end of a bearish trend.
Our team at Trading Strategy Guides is launching a new series of articles called Chart Pattern Trading Strategy – Step-by-Step Guide which will enhance and elevate your trading to a new level. The chart pattern trading strategy will only give you a framework to examine methodically the fight between the bulls and the bears.
The most profitable chart patterns are the ones who tells you who is winning the fight between the bulls and the bears.
The double bottom Forex reversal as the name suggests is a trend reversal pattern that basically is going to turn a downtrend into an uptrend. You can trade this chart pattern strategy on any time frame however the bigger the time frame the bigger the potential profit.
If you’re a daytrader or a swing trader it’s still good to learn the power of simple chart pattern formations as it can help you better understand the price action.
Moving forward, we’re going to discuss what makes a good reversal and highlight five basic trading rules to conquer the markets with the Double Bottom chart pattern strategy.
What is Double Bottom Reversal?
The double bottom breakout is a bullish reversal trading pattern that emerges at the end of a bearish trend. The reversal is composed by two consecutive bottoms with approximately the same equal lows. This is different from the double top breakout because the setups we’re looking for will be long trades, instead of short trades.
The first low is formed when the bearish trend finds support and the price retrace until it finds a resistance level that we call the neckline.
In the second phase the price move back downwards towards the support created early by the first peak but it fails to break it and instead it rallies to the neckline again.
The Psychology behind Double Bottom Reversal
The pattern highlights the battle between the bulls and the bears very well.
The reason why this works is because other market participants like to wait for confirmation that the support level is going to hold before committing any real money to a trade.
After the first bottom has been accepted and recognized by other traders, more traders can now identify without any effort the support level and trade the second bottom.
The bears will only capitulate when the breakout occurs as this is clear evidence that the market tide is turning around. So, the reversal is confirmed once the neckline is broken.
Now, let’s see how you can effectively trade with the strategy and how to make profits from basically using naked charts.
Double Bottom Chart Pattern Strategy – Buy Rules
The pattern is a good representation of seller exhaustion. When the sellers are running out of fuel that’s the time when a trend reversal usually happens.
The strategy also offers you an easy way to determine your profit objectives and a place where to hide your protective stop loss.
Trading with these techniques is much different than trading tops and bottoms, because with our strategy you have to be patient and wait for the trade setup to develop.
To trade the double bottom breakout you‘ll basically need just three things:
- A prevailing bearish trend.
- Two equal bottoms at support level.
- Candlestick breakout of the neckline.
Now is the time to go through the Double Bottom chart pattern strategy step-by-step guide:
Step #1: Identify the Phase of the Market. The Double Bottom reversal needs a downtrend.
Just because you can spot the reversal it doesn’t mean you have to jump in willy-nilly. Remember, we need the right context and everything needs to line up for a trade-able setup.
So, the first step is to identify the phase or the market condition. At any given moment the market can be trading either up, or down, or it can go sideways.
As we previously established the trade setup needs a prior downtrend.
Establishing the phase of the market aka identifying the trend is probably the biggest ingredient that can determine the success rate of double bottom pattern technical analysis.
Step #2: The historical precedent. An A++ Double Top Reversal is composed of 2 Rounded Tops
The second step of the Double Bottom is to find what we call the historical precedent or a chart pattern.
We don’t want to make a trading decision without price confirmation and in our case we use the reversal pattern. You need to identify two rounded bottoms in order for the pattern to be considered trade-able.
But, what is a rounded bottom?
In technical analysis, a rounded bottom is simply a price formation that typically occurs after an downtrend, prices move downwards and then quickly rallies creating a rounded bottom.
Now, of course, that depending on the structure the rounded bottom will vary in size and magnitude. But the idea is that we need a quick move down followed by a quick move up to define a rounded bottom.
Note* A valid double top reversal has two rounded tops.
Let’s move forward to the third criteria of our chart pattern strategy.
Step #3: Allow a maximum 10 pips variation between the two bottoms.
Don’t seek perfection, because in trading you need to get rid of your idealistic mindset as the pattern will not look perfect all the time, so be flexible.
This is the reason why we need to allow a maximum of 10 pips variation between the two bottoms.
The probability of two bottoms happening at the same exact price level is almost impossible.
If you don’t have a good understanding about support and resistance and how to plot them we’ve got your back. Read our insightful support and resistance tutorial here: Support and Resistance Zones – Road to Successful Trading.
So far, so good.
Now, we to determine an entry technique for our chart pattern strategy.
Step #4: Buy when Double Bottom breakout candle closes above the neckline.
After we identify the phase of the market, and the characteristics of a good reversal we need to wait for confirmation that momentum is shifting.
The breakout candle is our signal that the momentum has shifted and it’s what it confirms and validates the double top pattern.
You’ll see the double bottom breakdown happen over and over again, but it’s important to analyze them within the context of the market trend.
The next logical thing we need to establish for the strategy is where to take profits.
Step #5: Take Profit at the same price distance as measured from the highest peak to the Neckline
The minimum profit target for this type of trade is approximately equal to the same price distance as measured from the double bottom to the neckline.
If we project the same price distance to the downside we obtain our first take profit zone for the strategy.
The double bottom pattern can produce a major reversal so we advise you to be very flexible with your profit target not to miss any big profit opportunity.
The next important thing we need to establish is where to place your protective stop loss.
Step #6: Place the protective stop loss slightly below the support created by the Double Bottom reversal
The Double Bottom chart pattern strategy gives you a simple way to quantify risk because you can place your protective stop loss slightly below the double bottom pattern.
The double bottom pattern really gives you the opportunity to also trade with a tight stop loss, which is great as we always want to keep losses at minimum.
Note*** The above was an example of a BUY trade… Use the same rules – but in reverse – for a SELL trade, but this time we’re going to use the double top pattern. In the figure below, you can see an actual SELL trade example, using top bottom pattern.
Read our triple top patter strategy here: Triple top chart pattern strategy.
There is no other chart pattern that illustrates the trend reversal. However, despite the high success rate you still need to use a protective stop loss and to wait for the breakout when trading with the double bottom chart pattern strategy. You can also trade with the breakout triangle strategy.
The bottom line is that you still need a plan to successfully trade the double bottom breakout and our double bottom chart pattern strategy should answer to all your questions in regard to how to make money with this simple pattern.
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