How To Trade A Double Bottom Swing Trading Strategy

The double bottom chart pattern is a bullish reversal price action chart pattern that develops in a down trend and is recognized by the appearance of a low, a rally, and then price revisiting the same zone of the previous bottom.

 

It is much like it’s double top chart reversal pattern cousin except we are doing everything in the reverse.  A double top looks for a reversal after an uptrend.

 

Since we are using price action as the main building block of this swing trading strategy, you don’t have to rely on the lagging nature of any technical indicator.  Even the entry is done through a breach of the potential resistance level that shows up after the first bottom of the double bottom pattern is put into place.

 

This reversal pattern can be used to show a reversal in the man trend and as an entry pattern for a trade in the direction of the trend and in this case, we look to go long.  In the case of the latter, we are trading in the direction of the major trend after the shorter term trend ends with the double bottom pattern.

 

There can be many ways to trade a double bottom chart pattern strategy but like any trading, the important of risk management can never be ignored.

 

Key Elements of The Double Bottom Chart Pattern

 

After a long run of a downtrend, the formation of the double bottom can signify the potential for a complete reversal of the trend. Getting involved at the beginning of an uptrend (picking the bottom) can add to your bottom line in amounts that you can’t imagine. That is best case scenario.  

 

The second bottom does not have to come directly to the same price point of the first low that is put in.  In fact, a pure double bottom pattern is rare and you will often see price come above the zone or even poke below and then rally.

 

That is a trade setup by itself where traders get trapped short and are forced to cover their position as the uptrend gets underway.

 

The peak that shows up as price puts in the first bottom, starts to rally and then turns back down again is called resistance.  The violation of that resistance is what confirms the double bottom.

 

I will repeat that…..


A double bottom is not confirmed until the resistance level that forms between to the two lows is violated.


 

Depending on the size of the rally after the first part of the double bottom is put in, waiting for the resistance level to break can end up leaving the trader on the sidelines as a huge move gets underway.  You will want to learn other continuation chart patterns such as flags that can show that the double bottom is a likely chart pattern so you can find a trade entry before the resistance is broken.

 

What Is The Swing Trading Strategy

 

We are looking to take advantage of this chart pattern by allowing it to alert us to a possible change in trend.  We can even use it to get involved in the longer term trend as the short term downtrend exhausts itself.

 

 

  1. The market is in a downtrend which can be determined  by price action, a technical analysis indicator, or by a simple glance at the chart.  We need a downtrend in place.
  2. Price bottoms here with a solid rejection and after a quick test of support (not needed), price begins to rally
  3. The high is put in and for the double bottom to be confirmed, you will need a break of this level.  This is a weekly chart and this peak over a 1000 pips from lows
  4. Price moves back down and tests the zone of the previous bottom.  We need this zone to hold to have a chance at using our trading strategy to go long
  5. Price begins to rally and although not shown on this chart, price retraces to the .786 Fibonacci level (also the same level as that cluster of price above our number 4) and then goes onto a 7000 pip run before stumbling into a long term consolidation.

 

Stops and Price Targets

 

You need to use a stop loss and you can place it below the double bottom pattern as an easy choice.  Keep in mind that if you use another entry besides the break of confirmation resistance, a breach of lows does not make this double bottom invalid.

 

You can use an ATR – average true range – stop and that is my preferred method of placing stops regardless of the pattern I am using.  One point – the only time I don’t use an ATR stop is when trading a reversal as a violation of the high or low of the retrace or rally would invalidate my trade.

 

Price targets can be set via a measured move in line with the chart pattern.

 

 

The measured move target is simply the height of the pattern projected upwards which will give you a 1:1 reward risk ratio.

The Fibonacci targets simply use extensions which are price projections over 100%.

You can also trail your stop to lock in profits with various methods.

 

Alternate Trade Entry

 

You know that the low to resistance area is over 1000 pips and it can be frustrating for a trader to see price move without them.

 

We can use another technical analysis tool, the trend-line, to help us get into this trade

 

 

Draw a down trend line and enter when price breaks the line.  This is a front run of the confirmation entry and remember that you will often see price break a trend line and then retrace to test the trend line.  Ensure you have the psychological willpower to sit through the retrace.  Trust in the process and your calculated stop loss.

 

Some traders will  for watch for a bullish reversal candlestick formation and we do get one on the formation of the second bottom.  I would call that a failure test of the lows of a consolidation which is a bullish signal.


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Posted By marvinholmes : 31 August, 2020
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