The double bottom pattern is a reversal pattern where a down trend may be evolving to an up trend.Double bottom formations are also a continuation pattern if it shows up during the corrective move of a market and will be present in a trading range.Let's describe the double bottom chart pattern and design a logical trading strategy around it that takes into what this pattern represents.

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DOUBLE BOTTOM
CHART PATTERN
TRADING GUIDE

2. The double bottom pattern is a reversal pattern where a down trend may be
evolving to an up trend.
Double bottom formations are also a continuation pattern if it shows up
during the corrective move of a market and will be present in a trading
range.
Let's describe the double bottom chart pattern and design a logical trading
strategy around it that takes into what this pattern represents.
What Is The Double Bottom Pattern?
The best way to define and identify the double bottom actually shows up in
its name: price forms one bottom and then another.
Let's break down this Forex chart:
1. Double bottom is a bullish reversal so we need to see it occur after an
extended down trend. Time frame is not relevant.
2. The first low is where price finds support and the market rallies
3. The market rallies and many people think the trend is going to
continue and sell the market
4. Price comes into the zone around the first low where it acts as a
support level

3. 5. Price rallies up and breaks the potential resistance line at 3
In a perfect world, price breaks resistance and the down trend is officially
over.
Why?
A down trending market makes lower highs and lower lows. A break of #3
would be a higher high which begins the definition of an up trending
market.
In reality, we could be looking at a rally in price that is set to just resume
the down trend.
How To Trade The Double Bottom Pattern
There are several ways a trader may choose to trade this reversal pattern
and the trick is to find one, and stick with it.
I want to give you several options in terms of strategy and you can pick the
best one for you.
One thing we should decide is if we are going to play for a short term
trade with limited expectations or look to ride a new trend.
The difference is how you manage the trade and again, this is something
you are going to have to decide for yourself.
Some people will suggest using a moving average while others will suggest a
channel - either a trend line channel, keltner channel, bollinger bands, and
others.
My favorite is a channel, specifically a volatility measure such as the one the
keltner provides.
Why?
If I am going to trade a reversal pattern for a longer term, I want to see
some sign that the market is over extended.
We will get to the keltner channel strategy later.

4. Pre-Breakout Double Bottom Trading
The first strategy you could expand on is playing the basing under the
neckline or the breakout of the neckline.
What is basing?
Basing is when price is forming a small range just under resistance (or
above support).
• Price is in a down trend and forms a double bottom pattern
• As price travels up towards resistance, it stalls under resistance and
bases (green circle)
• Traders can place their order to go long prior to the breakout inside
the range that forms
• Stop (red dashed line) would go a distance below the base. Consider
using an ATR or structure (notice if you draw a line to the left from the
stop, it is in the area of former support
If you use this method, you would be in the trade prior to the breakout
which can, when momentum steps in, give you quick profits.

5. Traders can dial into a lower time frame and look for bullish price action
such as a failure test to enter the trade.
Breakout Over Neckline
This strategy would have the double bottom form, breakout over resistance,
and traders would look to position either on a pullback or market pause.
You will also see the previous strategy set up just below the red dotted line.
• Price breaks out and forms a one day range. Shorter time frames
(multiple time frame trading) highlights this much better but you can
infer the lower time frame price action by the candle
• Stops would go under the base that formed earlier.
• Price coming back inside the breakout level does not equal a false
breakout. Price would have to remain below resistance
• You can see in this example with the green circle, that price did pull
back into the breakout price zone
There are dangers that the breakout will not range until further up in
price. This would extend your risk needed for the trade.

6. If you wait for a pullback, price may have traveled a far distance before the
pullback occurs which could demoralize further buyers. While this pull back
in price took almost a month, not all are like this.
Double Bottom Divergence Setup
This strategy is going to use a bullish divergence signal in addition to the
double bottom.
You can use the relative strength index, stochastic, or my favorite, the
MACD.
Bullish divergence will show the indicator making a higher swing low while
price makes a lower or same level swing low as the first one.
There is a lot going on with this chart so I broke it down with a little more
detail.
1. Compare the two lows and note that the second low, is lower than the
first. This is a lower low after a lower high which is still a down
trend market structure
2. MACD (tuned to the 3/10 oscillator settings) shows that momentum on
the lower low is actually more to the upside. This is bullish divergence
3. A simple trend line break can be your entry by setting a buy stop order
just above it

7. Here's an important note: Because you entered right at the lows, ensure
you monitor price as it approaches the top line.
• If price bases, you can move your stop to where you'd place it if
trading the basing strategy
• If you note price losing steam or see a failure test of highs, you may
want to lighten up the position or take profits.
The big plus to this trade is you do get in at a price level that is favorable
before it tests resistance and that allows trade management. If price breaks
out and runs, you are making some quick profits.
Fake Out Strategy
This strategy gets you in right at the bottom of the pattern.
The great things about this strategy are:
• You get in at the low of the double bottom
• Price breaks out to the downside and rejects lower prices - trapping
trader short
• Traders exit their short positions by buying which propels your trade
into profit
The big difference in this strategy is seeing a strong rejection of lower
prices.
That bar or candlestick that shows the rejection, is actually our entry
point. The break of the double bottom resistance level is confirmation.

8. What sets this apart is your are looking for a spike below the previous low
and the rejection of lower price. You will then want a close above the
support line.
You can enter a buy stop above the rejection candlestick and as you can see,
you benefited greatly from the pattern.
Why look for the test of lows and rejection?
Failure to have price acceptance of those lows can force the short breakout
traders to get out of their position. Panicked traders can be like throwing
gasoline on a fire.
To find this type of rejection, consider adding a double bottom multiple time
frame approach as part of your trading plan. There will be times that the
close may be far off the lows if you wait for a daily candlestick to close.
Double Bottom With Keltner Channel
Confirmation
You can read more about trading the keltner channel here and I think it
works very well with double bottom patterns.

9. In brief, keltner channels will help measure the volatility of a market. The
upper and lower bands will help show where a market may be prime for a
snap back in price.
This market has been in a down trend on this 60 minute chart for about two
weeks. One thing to note is when price travels on the outside part of the
keltner channel, we are looking at a powerful trend.
Being strong in the one direction means is quite a lot of downside interest.
When it breaks, it can be severe but we need to have an idea, or some sign,
that it may break.
Enter the double bottom.
1. Price puts in the first low outside the band (not needed)
2. After a lazy retrace, price shoots to the downside and pierces the
band. In this case, it also sets up the fake out strategy with the
keltner confirmation
You can enter at close or use a buy stop above the rejection candlestick.
This is a strategy I highly suggest you test out for a possible trading plan.
Where To Exit Double Bottom Trades

10. This is a touchy subject because the reality is that you can be looking at a
new trend forming.
That is a trend follower dream but most of you won't be able to stomach
much adverse price action that trend followers go through.
A rule of thumb for profit taking for any chart pattern is to look at the height
of the double bottom pattern and project from the breakout.
This is the same chart from the keltner strategy and you project the height
of the pattern (from the resistance to the lowest low of the double bottom)
and project from resistance.
You can see that price is well on its way to the profit target and this
particular trade as a 1:1.68 risk reward ratio.
You can also use trailing stops which you can read about on this trading tips
blog.
Vital Points For The Double Bottom
Here are some keys to identifying the double bottom and trading it
1. Make sure we have an obvious down trend on the market and time
frame you are trading

11. 2. Look for price to put in a low and retrace to form a resistance zone
3. The second low does not have to be at the exact price as the first
low. We are looking for signs of rejection.
4. Trading before the resistance break is aggressive however we are
using other factors, such as the keltner, to tip the odds in our favor
5. Ensure your place and respect your stop loss
This is a pattern you can quickly scan for and using the keltner channel is a
highly effective way to zero in on a trading opportunity where the odds are
in your favor.
Like all trading strategies, ensure you test the double bottom trading
strategy you will use, and ensure you follow your trading plan.