Double Bottom Patterns Explained: How to Trade Them Like a Pro

Today, I’m going to give you a complete breakdown on how to trade one of the only chart patterns worth paying attention to in forex…

Yes, I’m talking about the double bottom pattern.

Along with its brother (the double top), the double bottom is a reversal pattern that forms often in forex. Created from price making two almost equal bottoms, it signals a reversal of the current trend or movement but can also indicate the start of a large retracement, depending on where it forms.

The double bottom can get you into some major reversal trades, and in this guide, I’m going to teach you EXACTLY how to use it.

Here’s what we’ll cover….

• What is the double bottom pattern?
• The psychology behind why it forms in the market.
• A 3 step guide to trading the pattern.
• The two entry methods you can use (and which ones better).
• 3 key facts to remember when trading the double bottom.

By the end, you should have no problems knowing what the double bottom is, why it forms, and how use it in your own trading.

Ready to get started?

Lets take a look…

The double bottom, along with its twin brother (the double top), is one of the most common chart patterns in all of forex.

A staple of technical analysis for decades, the pattern signals the beginning of a trend reversal – or large retracement in rare cases – as it shows the market has found support and buying has come in – a clear sign big traders (banks, hedge funds, etc) want price to reverse and the trend to change.

(More on this in a minute!).

As you can probably guess, the double bottom gets its name from how it forms: due to price making two bottoms (swing lows) at roughly similar prices.

Here’s a quick look:

During a downtrend or large down move, price finds support, then reverses and begins rising.

That creates the bottom #1.

After a small reversal, price falls back to roughly the same price as the first bottom, where it reverses again (bottom #2) and initiates the start of a new trend, or large counter-trend movement.

The reversal is confirmed once price breaks and closes above the neckline, which is the resistance turned support level created from price making the lows.

See below…

Sometimes the neckline will be horizontal, and other times it’ll be angled, like a trend-line.

Either way, it doesn’t matter: You must wait for price to close above (preferably in a strong fashion e.g via a sharp rise) to confirm the reversal is underway.

A key point to remember…

The two lows that form the double bottom don’t need to develop at the same price. One can appear slightly higher/lower than the other and vice versa.

 I’ve seen some guru’s – and books actually – say patterns with bottoms that peak below the 1st bottom isn’t a real double bottom, which isn’t true.

So long as the bottom is close to the low, the pattern is valid. It’s only when the second bottom forms way beyond the first that the pattern becomes invalid, and is more likely, just another lower low in the trend.

I’ve always said…  if you want to get good at trading forex, you need to start thinking about the why more than the what. And this especially true for chart patterns…

Anyone can look at a chart and find a pattern. That’s easy!

But few can explain the mechanics of why a pattern forms and what it means for the market. Chart Patterns don’t appear out of thin air; traders create the patterns via buying and selling.

The question is who’s behind the buying and selling?

Who buys during a huge downtrend when most traders are selling and almost all news is bearish and negative?

The answer… the banks.

Banks and other big traders in forex cause double bottoms to form, not retail traders like you and me – what many books and guru’s say.

Only the banks have pockets deep enough to reverse a downtrend – or up-trend in the case of double tops.

Us retail traders don’t have anywhere near the money to reverse a trend, not with our puny little accounts. Even with co-ordinated buying, we wouldn’t have enough… price would still drop like a rock!

So, how do the banks cause double bottoms to form?

Well, here’s the psychology behind it:

First, we have a downtrend or strong down movement, so most traders are selling.

The banks decide to reverse the market, either completely i.e trend reversal or partially via large retracement, to re-set traders’ expectations about the future. Why?

Simple – because the banks can’t make money when everyone trades in the same direction.

Forex is a zero-sum game, which means traders must lose for others to win.

When most traders trade in the same direction for a long time, like during a long downtrend, the banks can’t make money because no-one is losing; everyone is profiting from the trend.

The banks must either reverse the market and create a new trend or set off a large counter-trend movement to shake traders out and get them to trade in the other direction.

That gives them the ability to take the market south again, later on, causing the traders to lose and making themselves a large profit.

Now: In the case of the double bottom, price reverses because the banks buy into all traders selling because of the downtrend.

When the banks buy, price reverses. Many of the short traders now close their losing sell trades, resulting in an up-move.

That creates the first bottom.

Since this move isn’t that strong –many traders view it as a retracement to the trend – and the banks still have trades left to place, they take a small bit of profit to make price fall.

Ironically, that causes many more traders to pile in again – they think the trend is resuming.

But this isn’t the case. Once price returns to the source of the first bottom –where the banks placed their first set of buy trades – they place their second set, causing price to reverse again.

As price rises, the short traders, many of whom held on for the initial reversal, close their trades at a loss. That pushes price even higher – as you close a short trade by buying back what you sold – and ultimately, leads to the reversal we see.

And that’s how the banks cause the double bottom to form – pretty interesting, right?

Now let me show you how to trade the pattern…

The double bottom is one of the easiest chart patterns to trade, which makes it perfect for beginners or anyone who wants to quickly add another profitable set up to their trading strategy.

To trade the pattern, you follow three simple steps:

1. Wait for the pattern to form.
2. Enter a trade once the pattern is confirmed.
3. Take profits as price moves in your favour.

It’s easy enough, but there are few little things within each step you need to know to trade the pattern the right way.

Let’s look at each step in more detail…

While the double bottom is one of the more common chart patterns out there, you won’t find them forming every day – it is a trend reversal pattern after-all.

So, don’t expect it to replace your existing strategy.

Use the pattern as a side setup alongside your main strategy. That’s how I treat it in my trading. My core strategy – supply and demand – gives me most of my trades, and then my setups – chart patterns, candle patterns, etc – provide me with rarer trades that allow me to make additional profits.

Keep in mind, too: double bottoms don’t always form at the end of trends.

In rare circumstances, the patterns form mid trend and signal the beginning of a large retracement. These look identical to the trend reversal patterns, and you trade them in the same way – more on this in a minute.

For our example, we’re going to use this double bottom on Eur/Usd.

I thought I’d go with this one since it has nice clean swing structure – little to no spikes on the swings – and resulted in a decent reversal.

One of the unique things about the double bottom (and double tops too), is unlike most other chart patterns, you can trade them in two different ways:

Either trade the breakout of the neckline or the retest.

Both methods get you in at a decent price, and the stop location is the same for both. For my money, however, the retest is the better entry, and I’ll explain why in a minute.

First, here’s how to trade the breakout entry…

With the breakout entry, you enter long once price breaks AND closes above the neckline – which may or may not be horizontal like you see in the image above.

Any candle will do for the entry… so long as it closes ABOVE, that’s all the counts.

The stop goes below the low of the lowest bottom – bottom 1 in our case.

Being so far away from the entry is annoying, which is partly why I recommend the retest entry. However, you can bring this up to the 50% level of the swing once the break is confirmed.

Quick tip for this method…

Only enter once you see a big bull candle or sharp rise after price has closed above the neckline.

By the time price has reached the neckline, a large part of the swing is over, which means a retracement is likely to begin.

This’ll usually come after price breaks above the neckline (setting up a retest entry), but sometimes it’ll take place before, causing drawdown if you get in.

By waiting for a big bull candle or sharp rise to push price above the neckline, you can avoid this, as it confirms price is heading higher, making the entry a lot safer.

Speaking of safety…

The safer way of trading the double bottom, and my preferred way of trading the pattern, is by using the retest entry.

This has you enter on the retest of the broken neckline that often happens after the pattern is confirmed and price breaks above.

For the entry, you must wait for price to return to the neckline after the breakout.

Then you need to wait for a signal price is going to reverse and head higher again.

In my experience, the two signals that perform best are a sharp rise away from the neckline – so two or three consecutive big bull candles forming – or a large bullish engulfing candle.

Both provide good confirmation price is set to continue rising.

Pin bars can work too, but they tend to be a weaker signal than the others.

Your stop goes below the low of the neckline retest (for a sharp rise away entry).

If you enter after seeing an engulf, the stop goes either below the low of the retest, or, below the engulf itself if that creates the lowest low of the re-test.

Any method of taking profits will do when trading the double bottom. The choice is up to you.

That said, I always recommend taking partial profits at two key times during the pattern:

1. Once price reaches 50% of the swing – if you’re trading a neckline break.

2. When price has moved 150% of the initial break if trading a retest.

If you enter using a neckline break, price won’t always retrace to retest the level – the main disadvantage of using a retest entry. Since you don’t know whether that’ll happen, it’s important to take profits around the point where the retracement could begin – roughly 100% of the current swing.

To figure out where that is, measure the swing using the fib tool once price reaches the neckline.

Without changing the location of the two ends of the tool, place the lower point on the breakout of the neckline and see where the upper point falls.

Mark this on the chart as a line.

Once price reaches this point, make sure to take some profit off.

A retracement back to the neckline has a high probability of beginning here.

It wont always happen, and it won’t always make it all the way back to the neckline, but the chances of some kind counter swing movement here are high. Because by this time, the banks will want to take profits off the long trades they placed at the two bottoms.

If you enter using a retest, the other key point to take profits is when price reaches the 150% of the upswing before the retest began – the swing that causes the breakout in other words. Why take profits here?

Usually, price will retrace – or reverse in some cases – around this point.

The banks have made most of their profit by now, so they often take the market in the other direction to re-set traders expectations about the future, like I explained earlier. Before you can find the 150% point, you need to enable the 150% retracement level on the fib tool

On Tradingview, this is done using the fib settings menu – right click the tool and hit “Settings”.

Then enable then 1.5 level inside the “Style” tab.

If you use MT4, things are little more difficult…

The 150% level doesn’t show by default; you must enter the values manually using the options menu. Open the menu by right clicking the line and selecting “Fibo Properties”.

Once inside, head over to the “Fibo Levels” tab where all the levels are located along with their respective ratios.

Scroll down into an empty space, then double click the left box and enter 1.5.

Now click inside the box to the right, enter “150”, and hit “Okay” to apply the new settings.

And with that, you’re good to go!

Now all you need to do is place the fib tool on the upswing before the retest…

Wherever the 150% level sits, that’s the point you’ll probably see a retracement begin and need to take profits.

Listen, I’m not exactly a fan of chart patterns.

Most of them either never show up or just don’t work very well, making them a waste of time in my book.

But the double bottom?

That’s a different story.

The pattern pops up often enough to be worth paying attention to, and it’s also got some serious real world backing from the banks. Basically, it’s the one chart pattern that doesn’t suck.

So, if you want to spice up your trading strategy, give the double bottom a try.

More info coming soon, so stay tuned!”