HOW TO TRADE DOUBLE BOTTOM CHART PATTERN

How to trade double bottom chart pattern
Infographic - How to trade double bottom chart pattern

Entry: after breaking the pattern's upper border at point (4), either with an entry after the breakout, or after a possible retest of the upper border.

Take profit: identified by measuring the vertical distance between the pattern's upper and lower borders, that measurement is then applied from the breakout rate (4)

Stop loss: the pattern's upper border, which is identified by point (2)

DOUBLE BOTTOM PRICE ACTION

This chart pattern starts forming with bears already in control of the exchange rate's downtrend. Bulls make a stand at a certain rate that will be tested exactly twice before they are finally able to reverse direction, and the exchange rate starts an uptrend.

Let's break down the pattern formation!

In a downtrend, price action finds the first resistance (1), which will be the horizontal resistance for the rest of the pattern formation.

Price action reverses direction from the first resistance (1) and goes upwards till it finds support (2), which will be the only high in the pattern.

Price action reverses direction from support (2) and goes downwards, till it finds the second resistance (3), which will be around the same rate of the first resistance (1)

The pattern is completed when price action reverses direction from the second resistance (3) and goes upwards till it breaks the pattern's upper border at point (4)

NOTES ON DOUBLE BOTTOM

Direction

Reversal

Type

Bullish

Occurrence

High

Common term

All

Pip distance of the trend prior to the pattern formation should be noticeably longer than the pattern formation itself.

After the breakout, retesting the pattern's upper border, which was a resistance that turned to support, is highly possible.

Volume is usually high when reversing from the second resistance (3), as well as when breaking the pattern's upper border.

This pattern is commonly found on all time frames.

DOUBLE BOTTOM REWARD:RISK

R:R depends on the (upper border-entry rate) distance, compared to (lower border-upper border) distance.

Always remember that the stop loss level explained above is absolute, the actual stop loss rate for your trade setup should be a bit beyond those levels to give the trade setup some room to breathe, and of course, calculations for position size and R:R should be done with respect to that rate.

DOUBLE BOTTOM REAL TRADE

Double bottom real trading example
Forex chart - Double bottom real trading example, as found on the D1 chart of AUD/USD using XM's MT4 platform

PRE-BREAKOUT CALCULATIONS

Since a double bottom chart pattern can be spotted after the reversal from point (3), you can save yourself precious time by doing the following set of calculations before the breakout, since they don't rely on the trade's entry rate.

Note: identifying the pattern's lower border rate is subjective since the rates of points (1) and (3) won't be exactly the same. We prefer choosing the point with the higher rate to keep the pattern compact, which in this trade is point (3)

  • Pattern length (point (2) rate - point (3) rate)
    • (0.92320 - 0.88911) * 10000 = 340.9 pips
  • Take profit rate (breakout rate + pattern length)
    • 0.92320 + (340.9 / 10000) = 0.95729
  • Stop loss rate (breakout rate - 25% of pattern length)
    • 0.92320 - ((25 * 340.9 / 100) / 10000) = 0.91468

TRADE SETUP

Choosing when to enter the trade after the pattern's upper border breakout is always left to your best judgement. In this trade, we chose to enter the market at the closing rate of the candle that broke the pattern's upper border, which was a strong bullish candle that closed well beyond the upper border's rate, suggesting a real breakout for the pattern's upper border.

  • Trade entry rate
    • At the closing rate of the candle that broke the pattern's upper border at point (4): 0.93091
  • Take profit in pips (take profit rate - entry rate)
    • (0.95729 - 0.93091) * 10000 = 263.8 pips
  • Stop loss in pips (entry rate - stop loss rate)
    • (0.93091 - 0.91468) * 10000 = 162.3 pips
  • Stop loss R:R (take profit in pips / stop loss in pips)
    • 263.8 / 162.3 = 1.625

Currency pair

AUD/USD

Timeframe

D1

Breakout

10-Sep-2013

Platform

MT4

Broker

XM