The double bottom pattern forms when the bottoms and a neckline is formed. The bottoms are known as support zones that are very important zones that can influence the price in the forex market.
A double bottom pattern can be traded by opening a buy (long) order when the second bottoms occur. The double bottom market pattern is similar to a double top pattern, the double bottom has bottoms instead of tops.
Reading this article will help you understand much better how to identify and trade the double bottom pattern in forex trading.
How to spot a double bottom pattern
The example below shows a double bottom chart pattern. As you can see we have the support created at the bottoms that are shown on the price chart below. The bottoms act as major reversal zones. The double bottom pattern has started to form first when the price went down and created the first bottom at the 116.810 level.
Support line was created at that level because the buyers (bulls) defeated the momentum of sellers.
And the price couldn’t go further down so it went up for some pips. And created the neckline at 119.164 level. The neckline acts as a resistance zone.
After the resistance was created, the price made a strong move and tested the first bottom (support). But again the price didn’t break the support line at 116.810 and the second support line (second bottom) was formed.
When the second bottom starts to forms just like this example, then you most likely a double bottom pattern will form.
And in our scenario, that’s correct, the double bottom started to form. After the second bottom (support) was formed, the price tested the neckline resistance level at 119.164. Now we can assume that the market has formed a double bottom pattern.
How to trade the double bottom pattern
We explained how you can identify potential double bottom patterns. But before we explain how to trade them, you should take these examples that we explain as examples to learn how to trade them. And since the market is unpredictable sometimes, you should do the technical analysis correctly.
Below on the images, we have explained where to open the buy order and where to set the take profit.
When the price tested the first support (bottom) created, and couldn’t break that zone, that should be your entry order.
The buyer momentum on that zone created a key support level and entry after the bullish (green) candle was closed, would be a good entry price.
The stop loss is required as always to use, and in this example, we could place the stop loss just below the support zone. Stop-loss should be placed based on the time frame you’re trading. If you trade a double bottom pattern on a 1-hour time frame, then the stop loss should be placed more tighter.
In this example, we placed the stop loss just below the support zone. Because the price can change direction to a bearish momentum, and the stop loss should be placed just below the support zone to protect further losses.
But if you trade on the 4-hour or longer timeframes, then stop loss should be placed wider, because the longer timeframes have more volatility in terms of pips. So your stop loss should be set more widely but it can be riskier as it can affect your risk management.
When you open a buy order after the support zone doesn’t break for the second time, then it can give you a good amount of pips to catch.
The take profit should be placed on the neckline level because the neckline it’s very decisive in the break of the resistance or not. And since you opened the buy order with a take profit at 119.164, you would catch over 200 pips.
A double bottom price action pattern and other price action patterns, in general, are safer to trade. They can give you a better analysis of the market to predict the next movement of the market.
But you as a trader should always use a stop loss in your buy orders when you trade double bottoms. The example we showed you can help you learn how to trade double bottoms.
You should trade double bottoms based on your analysis and trading strategy. Because not each double bottom chart pattern will go according to your plan. Some patterns are continual patterns and some are reversal patterns. So you need to practice how to react when a double bottom starts to change the direction or it doesn’t hit your take profit (neckline).
The examples we give on our blog are based on our analysis. But you as a trader should always trade according to your analysis.