How to Trade Double Bottom

• A Double Bottom is formed when price tests a previous low and bounces.
• Buy orders can be placed just above previous low.
• Limit orders can be set at most recent swing high, stop set 33% of limit distance.

One way to trade ranges, is to look for the Double Bottom chart pattern. It occurs when price tests a previous low and fails, followed by price bouncing higher. This trade setup allows traders to place relatively tight stops and generous profit targets. So we are able to risk a little in an attempt to make a lot with a positive risk:reward ratio.

Locating of Previous Lows

A Double Bottom pattern starts off with a swing low followed by a sudden rebound higher. In other words, price bouncing off of a fresh support level. At the low, we want to extend a horizontal line out into the future.

The chart above gives us a clear example of price bouncing from a swing low and then moving higher. The low is highlighted in yellow with a black horizontal line extending into the future. We draw this line because we will use it to create our trade entry.

Setting Up Trade Entry

Double Bottoms can be tricky. They won’t always be perfect. There will be times when price will come down and hit the exact low price and bounce higher. But there will also be times when price bounces before reaching the previous low or will bounce after temporarily piercing the previous low. This is the reason why I recommend placing our entry order a few pips above the previous low. This will ensure we do not miss an entry but at a cost of getting a slightly worse entry.

The chart below shows the previous low labeled with our buy entry order set a few pips above the previous low. We are buying at this level in anticipation of a bounce and the double bottom to be fulfilled. We then will need to setup our exit strategy while we wait

Setting Up Trade Exit

So now that our Entry is set up, we need to focus on how we are going to exit our trade. We want to first set our profit target at the previous high that was made following the initial swing low that we highlighted before. The idea is that price will at least be able to have enough strength to test this swing high.

Once our limit is created, we then want to set our stop loss 33% of the limit’s distance. In our example, the distance between our entry and our limit was 27 pips. That means our stop loss will be set at 9 pips. This accomplishes two goals.