The double bottom is one of the most common chart patterns for forex and stock traders alike. You’d struggle to scroll through the last months worth of data on some forex pairs without seeing a huge amount of these double bottoms cropping up throughout. Although simple to spot, these patterns are very useful and it’s great to have them in your toolbox of trading setups.
A double bottom, without knowing how to trade it, is not worth the chart it’s printed on! In this article we are going to look at the pattern, how to trade the double bottom and how you can incase your edge in the forex markets by utilising it correctly. Let’s get into it…
- What Is The Double Bottom Pattern?
- How To Trade The Double Bottom Pattern?
- How To Avoid Some Losses When Trading Double Bottoms
- In Conclusion – The Double Bottom Pattern
What Is The Double Bottom Pattern?
The double bottom is a very simple forex trading pattern. You’ll typically find these setups at the bottom of large moves to the upside and thanks to the high volume the forex markets have, they’re very frequent across all time frames.
The double bottom has 4 main features:
- Firstly, a drive down and a large retracement to the upside.
- Secondly, price moves back to the same area of support.
- Thirdly, price pushes out of the area for a second time.
- Lastly, price breaks above the previous retracement high (the neckline).
These constitute all of the main criteria of a double bottom. Some of the formations will look perfect, like in the image above and some will look slightly less perfect but they’re still valid.
How To Trade The Double Bottom Pattern?
There are multiple very simple ways to trade a double bottom pattern. Let’s take a look at a few of the most popular ways that I also use myself to execute these trades.
1. Trading The Double Bottom As An Entry Method
Using the double bottom as entries is a great way to trade them, rather than using them on their own as a standalone piece of analysis…
As shown here, we have a demand level in purple. This may also be known as a support level, depending on where you learned to trade.
When we come back to the support level, it would be a great place to buy, in theory. However, we don’t want to buy straight away until we have some type of confirmation that price is going to go our way. This is where the double bottom comes into play…
The double bottom is formed in the support zone, meaning our confluence of trading long is stacked. As shown in the USDJPY chart, this makes for a great entry method.
You can also use double bottoms for entries on:
- Support levels
- Demand zones
- Significant lows
- EMA rejections
2. Trading The Double Bottom As Directional Analysis
Another great way to utilise the pattern is to use it for your direction bias, then combine with further analysis…
In this chart, we are looking at EURUSD on the H1. The price formed a double bottom then started moving to the downside. Instead of actually entering the initial pattern, we can just sit on the sidelines and see what price does. Was the formation enough to reverse price?
Well, once price started moving up and had clearly broken the double bottom neckline, we had numerous opportunities to take entries. For instance, we have the break of a large trend line, the break and retest of a key support level and the retest and cross of the EMA’s.
In short, we have used the double bottom to give us the directional bias that we want to be taking long trades. We then used price action to give us entries, using the directional confluence given.
How To Avoid Some Losses When Trading Double Bottoms
Getting into a double bottom setup prematurely will result in a huge amount of losses. There are a few ways to help avoid this happening though, so you’re only getting involved with valid trades. When backtesting, there are plenty of times you think you could have entered a double bottom early, but what you aren’t seeing is the hundreds of failed double bottoms that looked promising at the time!
Waiting For A Break Of The Double Bottom Neckline
In this example on EURUSD 30M, price made a double bottom in a bullish trending market. As price pushed up in the second half of the double bottom, you could have entered the trade on the break of the peak or neckline.
In this case, the trade worked and you would have been able to net a 1:2 risk to reward ratio from doing so. However, entering just on the break is risky and should only be done in certain circumstances. For instance, if you’re in a downtrending market, the chance of price breaking the neckline of a double bottom is still high, but the likelihood of that trade winning is reduced.
This is something that needs to be backtested by a trader, in conjunction with your usual trading setup. I have a guide here on how to backtest a forex strategy.
Waiting For A Break And Retest Of The Neckline
In this example on XAUUSD, price created a clean double bottom on the lower support level. Although clean, it would have been premature to enter this trade without waiting for further confirmation – in this case, in the way of a retest.
Price breaks through the neckline and comes back to retest it, forming a rejection on the lower time frames. At this point, the double bottom has been confirmed and is less likely to be classed as a fake breakout. With a lenient stop loss, allowing for price movement, you were still able to attain a 1:2.6 risk to reward ratio in this trade.
Important Tip – Don’t Marry Your Analysis
One thing that I see time and time again in retail traders is blindly marrying analysis. No matter what the market conditions are, or what the price action is showing, traders like to stick with their guns until stop loss. For instance, in this XAUUSD chart above – we can see a double bottom formed on the lower support level.
Price rejected the level with the double bottom pattern and moved up higher. If you were waiting for a confirmation break of the neckline, you would have entered fairly late into this trade. Price then started rejecting a key support/resistance zone, alongside a descending trend line. At this point, the traders should look at reducing risk or covering stop losses to breakeven in the long positions, in case price is going to continue the downwards momentum.
I would say that the majority of the time, double bottoms are not the catalysts of huge reversals. They’re more so established with smaller pullbacks in price, meaning you need to be fluid with your exits after taking your initial positions.
Important Tip – Not All Double Bottoms Are Identical
In textbooks and on Babypips, we are only ever going to see the perfect double bottoms. The perfect patterns occur maybe 1 in 7 times and the rest of the time the patterns are not so clean! This is just the nature of the forex markets being so liquid and aggressive.
In this screenshot from Tradingview, we are looking at a double bottom on EURUSD. The right leg of the setup doesn’t come all the way to an equal low, creating a higher low formation. Although not perfect, this can still be considered a double bottom.
Due to being imperfect in nature, entering on just the break of the neckline here would be too risky. As you can see, from waiting for a retest, this would have resulted in a great trading opportunity.
I wouldn’t recommend making a habit of trading these lower quality setups, especially as the good opportunities are so rife, however, it’s worth keeping your eye on over the next few months to test the waters.
In Conclusion – The Double Bottom Pattern
In this article, we looked at the double bottom pattern that emerges constantly in the forex markets. It’s one of the most popular patterns and once you have an eye for it, you’ll see it clearly many times per day! On it’s own, the pattern isn’t too useful but when combined with other price action factors, you’ll see a lot of value added to your trading setups.
In this article we covered:
- What is a double bottom in the forex markets?
- How to trade a double bottom pattern
- Using the pattern for entries
- Using the pattern for directional bias
- How to avoid taking as many losses
- Using the neckline
- Using the break and retest
- A few important tips to consider
I hope you have found this useful! If you have used double bottom patterns before and have any kind of experience, pleas do leave a comment down below – I’d be very much interested to hear your opinion!