3 Trading Strategies to Trade The Double Bottom in Forex

Looking to trade the Double Bottom in the Forex Market?

Double Bottoms can be very profitable reversal trades if you trade it the right way.

However, many traders struggle to be profitable when trading the Double Bottom because they are trading every Double Bottom that they see.

What many traders don’t realize is that there are Double Bottoms that can be traded…

While there are Double Bottoms that should be avoided.

So how do you know exactly which Double Bottom to trade?

In this post, I’ll share with you exactly what a Double Bottom is…

How to identify the 3 different types of Double Bottoms…

And I’ll also share with you 3 trading strategies to trade the Double Bottom.

Let’s dive right in.

What is a Double Bottom?

If you know how to identify a Double Top, then you should have absolutely no problems identifying a Double Bottom because it’s simply the upside-down version of the Double Top.

It pretty much looks like a “W”.

And if you invert the Mcdonald’s golden arches, then you have yourself a Double Bottom:

Where do you find Double Bottoms?

Most of the time, Double Bottoms are found in a downtrend.

A downtrend is basically when the market forms Lower Lows and Lower Highs like this:

To further define whether the market is in an uptrend or downtrend, I like to use two Exponential Moving Averages – the 20 EMA and the 50 EMA.

If the 20 EMA is above the 50 EMA, I consider the market to be in an uptrend.

And if the 20 EMA is below the 50 EMA, I consider the market to be in a downtrend.

Here’s how a Double Bottom looks like in a downtrend:

The Double Bottom generally signifies the end of a downtrend and it’s the turning point where the market transitions either into a sideways market or an uptrend.

However, what not many traders know is that Double Bottoms can also be found in an uptrend.

And here’s how a Double Bottom looks like in an uptrend:

Though this is rarer than finding a Double Bottom in a downtrend, it can certainly appear in an uptrend as well.

And when it does, it can be a high probability trade if the conditions are right.

Now, before we get into how to trade the Double Bottom…

You need to first understand that the Double Bottom has 3 formations.

The 3 Formations of A Double Bottom

While many people think that the Double Bottom is just simply two swing lows with the same low…

There’s actually a total of 3 formations of the Double Bottom that you need to take note of:

Double Bottom with roughly the same swing low.
Double Bottom with a Lower Low.
Double Bottom with a Higher Low.

1) Double Bottom With the Same Swing Low

The diagram above shows a Double Bottom forming in a downtrend.

This is the most common type of Double Bottom that traders look for.

Most of the time when the market is in a downtrend, the Double Bottom will form below the 20 EMA and 50 EMA.

But in an uptrend, a Double Bottom can form either below or above the EMAs.

2) Double Bottom With a Lower Low.

The diagram above shows a Double Bottom with the second bottom slightly lower than the first bottom.

The important thing to note here is that we don’t want the second bottom to be much lower than the first bottom.

If the second bottom is much lower than the first bottom, then it will be considered a normal downtrend wave (forming Lower Lows and Lower Highs).

And that signifies a strong momentum in the downtrend.

3) Double Bottom With a Higher Low.

The diagram above shows a Double Bottom with the second bottom higher than the first bottom.

This can signify a weakening of the downtrend and could be the first Higher Low of an uptrend about to be formed.

But not all Double Bottoms with Higher Lows lead to a reversal of the trend.

That means you do not want to trade every single Double Bottom that comes your way as mentioned before.

You want to know how to identify which ones to trade, and which ones to avoid…

And only want to cherry-pick the ones with the highest probability of working out.

Now that you know the 3 formations of the Double Bottom, let’s get into the details of how to trade them.

How to Trade the Double Bottom in Forex

When it comes to trading the Double Bottom in the Forex market, there are 3 ways to trade it.

All of them work well, so it comes down to which one you feel the most comfortable trading.

Trading Strategy #1: Break of Neckline

This is how Technical Analysts trade the Double Bottom and is the most standard way of trading it.

To go Long, you have to first identify the neckline of the Double Bottom:

You can see in the diagram above that the neckline is drawn across the “peak” between the two bottoms.

Some traders go Long at the break above the neckline.

And some traders go Long at the close above the neckline because they want to avoid false breakouts.

So it depends on how conservative you are.

If you are more aggressive, go Long when the market breaks 1 pip or more above the neckline.

But if you’re more conservative, go Long only when the market closes above the neckline.

Here are the entry rules to go Long:

Wait for either of the 3 Double Bottom formations to form.
Once the Double Bottom has been formed, go Long at either the break above the neckline or at the close above the neckline. Alternatively, wait for the close above the neckline, then place a Buy Limit Order below the close for a better entry.
Place Stop Loss below the low of the second bottom. Then place Take Profit level at 2R.

Let’s take a look at an example:

In the chart above, the market formed a Double Bottom and it tested the neckline once.

After that, the market went back up and closed above it.

That’s the signal to go Long.

Again, you can either go Long once the market break above the neckline…

Or you can wait till the candlestick closes above the neckline.

What I like to do is wait for the close above the neckline, then place a Buy Limit Order below the close.

So in the above example, the market closed around 106.42.

What I would do is place a Buy Limit Order below it at 106.35 or even 106.30.

In this case, I wouldn’t have been filled on either order.

But I’m fine with that because I know there are many more trade opportunities to come.

Trading Strategy #2: With Bullish Candlestick Patterns

The second way to trade a Double Bottom is when there is a bullish candlestick pattern formed at the second bottom.

What we are looking for are three distinct bullish candlestick patterns:

Bullish Pin Bar
Bullish Piercing Pattern
Bullish Engulfing Pattern

These are how they look like:

To go Long, wait for the candlestick after the bullish candlestick bar to close above the high like this:

So here are the entry rules to go Long with the bullish candlestick patterns:

At the second bottom, wait for a bullish candlestick pattern to form.
Once the bullish candlestick pattern is formed, see that its close is above the previous swing low (the first bottom’s low). If the close is below the previous swing low, then this is not a valid trade. If the close is above the previous swing low, the trade is valid.
Wait for the next bar to close above the bullish candlestick pattern.
At the close of the next bar, go Long at the market or place a Buy Limit Order below the close for a better entry.
Place Stop Loss below the low of the bullish candlestick pattern. Place Take Profit level at 2R.

Let’s take a look at an example:

In the chart above, you can see that there is a Bullish Pin Bar formed at the second bottom.

This Bullish Pin Bar broke the low of the first bottom and closed above the first bottom’s low.

This is a bear trap, which is the opposite of the bull trap I mentioned earlier.

Similar to the bull trap, this bear trap caught all the traders that went Short when the market broke below the first bottom’s low.

After catching the traders that went Short, the market reversed and formed a Bullish Pin Bar, which resulted in the second bottom forming.

This is a high probability Double Bottom pattern and one you want to look out for when trading Double Bottoms.

Trading Strategy #3: With Divergence

For trading Double Bottoms with divergence, we use Regular Divergence and Hidden Divergence.

We use Regular Divergence on:

Double Bottoms with the same swing lows.
Double Bottoms with a Lower Low.

For these two formations, we are looking for the Stochastic Oscillator to show a Higher Low to indicate a divergence.

Here are the entry rules for a Double Bottom with Regular Divergence:

Wait for a Double Bottom with either the same low or a Lower Low to form.
Once the Double Bottom is formed, look at the Stochastic Oscillator to see if it shows a Higher Low for divergence. If it shows a Higher Low, this is a valid trade. If it doesn’t show a Higher Low, this isn’t a valid trade.
Once the Stochastic Oscillator shows a divergence, go Long when the market closes above the 20 EMA or place a Buy Limit Order below the 20 EMA for a better entry.
Place Stop Loss below the low of the second bottom. Place Take Profit level at 2R.

Let’s take a look at an example.

The chart above shows a Double Bottom with roughly the same lows.

However, the Stochastic Oscillator is showing a Higher Low indicating a divergence.

And if you noticed, there is a Bullish Pin Bar formed at the second bottom as well and it closed above the low of the first bottom (previous swing low).

This is a strong sign of reversal because there are 3 signs of confluence happening:

There’s a Double Bottom
There’s divergence
There’s a Bullish Pin Bar.

While the market didn’t go up immediately, it eventually did go up as you can see on the right-hand side of the chart.

When there’s a confluence of different bullish or bearish patterns, there’s a very high probability of the pattern working out.

Next, the chart below shows an example of divergence on a Double Bottom with a Lower Low.

On the left-hand side of the chart above, you can see that the market had been in an uptrend forming Higher Highs and Higher Lows with the 20 EMA above the 50 EMA as well.

As mentioned earlier, Double Bottoms can also appear in an uptrend and that’s what has happened in this chart.

You can see on the chart that the Double Bottom has a Lower Low, but the Stochastic Oscillator is showing a Higher Low.

Hence indicating a divergence.

Lastly, to trade Double Bottoms with Hidden Divergence, we are looking for:

Double Bottoms with a Higher Low.
The Stochastic Oscillator to form a Lower Low.

Here are the entry rules for a Double Bottom with Hidden Divergence:

Look for a Double Bottom with a Higher Low to form.
Once the Double Bottom is formed, look at the Stochastic Oscillator to see if it shows a Lower Low for a Hidden Divergence. If it shows a Lower Low, this is a valid trade. If not, this isn’t a valid trade.
Once the Stochastic Oscillator shows a Hidden Divergence, go Long when the market closes above the 20 EMA or place a Buy Limit Order below the 20 EMA for a better entry.
Place Stop Loss below the low of the second bottom. Place Take Profit level at 2R.

Let’s take a look at an example:

In the chart above, a Double Bottom with a Higher Low is formed.

Notice that the Higher Low isn’t too far away from the previous swing low.

At the same time, the stochastic indicator is showing a Lower Low indicating a Hidden Divergence.

Here’s another thing that’s interesting about the chart above…

If you noticed, just before the Double Bottom with a Higher Low is formed, there is another Double Bottom formation before that.

That is a Double Bottom with a Lower Low, but the stochastic indicator is showing a Higher Low.

Hence there is a Regular Divergence there.

So if you had missed the entry on the first Double Bottom (with the Lower Low), you would have another chance to enter on the second Double Bottom (with the Higher Low).

And regardless of which one you traded, both would be profitable as the market eventually went up.

Conclusion

Here’s a summary of what you have learned in this post:

Double Bottoms are reversal patterns that generally signify the end of a trend.
Double Bottoms can be found in both a downtrend and an uptrend.
There are 3 different formations of a Double Bottom:
- Double Bottom with the same low.
- Double Bottom with a Lower Low.
- Double Bottom with a Higher Low.
There are 3 trading strategies to trade the Double Bottom:
- Using the neckline to go Long.
- Using bullish candlestick bars to go Long.
- Using Regular Divergence and Hidden Divergence to go Long.

With this knowledge, you are now better equipped to trade the Double Bottom than the 95% of the traders out there.

Now it’s time to go to your charts and see if you can put what you’ve learned in this post into practice!

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