Trading Double Bottoms for Profit

The double bottom pattern is a doozy and no doubt a favourite amongst traders of all markets because of it’s reliability and profit-making potential.

In this UTG guide, we’ll be looking at all the traits of a perfect double bottom set up so you can make some sats from this awesome pattern!

How to Spot a Double Bottom Pattern

Firstly, it’s immediately obvious that the double bottom pattern looks like the letter W and while that’s a great way to remember it, things don’t always look this pretty, however, the idea behind the formation still remains the same. 

Location matters… we say this a lot at UTG, but in this case, it definitely rings true as we want to look for this pattern to occur at the end of an extended downtrend signaling that the bottom is in (pardon the pun) and that a potential trend reversal is imminent.

Looking at the image above you can see that we’ve been in a downtrend until we bounced where “bottom 1″ is formed, which creates our first level of support. From that bounce, we’ve then been rejected at what now becomes the “neckline” or our first point of resistance. 

Note: Looking further left on the time frame you’re trading could also show previous resistance where you neckline now is. 

Now is where things get interesting and we need to start paying attention, well before the pattern has been confirmed. As bottom 1 is now in place, we’ll be looking for the second bottom to take place at that level of support and bounce as we did previously to create that W shape of the double bottom pattern… but that’s not all. 

A mistake that beginner traders will often make is immediately assuming that once the shape of the double bottom is created, that it’s moon time. 

Patience grasshopper, for we want to see one last thing before we start counting our profits.

For traders who know how to play these markets, patience wins, as was the case with the image above where we had a clear break and close above the neckline, confirmed that the double bottom is in and the bulls are in charge.

Trading the Double Bottom Pattern

Similar to breakout trading, trading the double bottom pattern shares the same mentality in that traders should wait for the break and re-test of the trend line before making an entry. 

This is a common mistake that traders will make, automatically assuming that the best time to buy is the immediate break of the trend (or next line in this case), and while that can yield profits on a FOMO run, we’d rather wait for a strong confirmation to enter and book more consistent profits. 

As the above image illustrates, the trader who shows patience and waits for the re-test would be in a better position than a trader who simply bought the break and most likely sold or didn’t book profits before we revisited that neckline.

This re-test of the neckline provides us a great entry opportunity and peace of mind that it is a true double bottom and not simply a fakeout.  

Potential Targets for The Double Bottom Pattern

This is where things get a little more complicated and where we need to have our wits above us to ensure we aren’t placing trades in the opposite direction of the overall trend and losing pips or sats. 

As with trading other patterns, finding your potential profit targets is relatively easy to get your head around.

However, as with all potential take profit areas, you need to pay attention to other things such as trading volume, your indicators, as well as other levels of support and resistance prior to your predicted take profit level. An easy way to get around this is to simply have a trailing take profit (using something like 3 commas) or manually moving your stop loss us and letting the trade ride before your TP level.

In the image above, we can see that the distance from the next link to our take profit level is the same from our double bottom area to the neckline. 

This is called a “measured move”.