The double bottom pattern is a popular chart pattern used by forex traders to signal a potential bullish reversal in a downtrend. It is a pattern that looks like the letter “W” and is formed when the price of an asset reaches a low point twice, but fails to break below this level. When a double bottom pattern appears, traders can use it as a signal to enter a long position and take advantage of the potential price increase.
In this article, we will discuss how to trade the double bottom pattern in forex.
Identifying the Double Bottom Pattern
The first step in trading the double bottom pattern is to identify it on a chart. The pattern consists of two lows that are roughly equal, separated by a peak in the middle. The pattern is complete when the price breaks above the peak, confirming the bullish reversal.
It is important to note that the double bottom pattern should only be traded in a downtrend. If the pattern appears in an uptrend, it could indicate a potential trend reversal, but it is not a reliable signal.
Entering a Long Position
Once the double bottom pattern is identified, traders can enter a long position. The entry point is when the price breaks above the peak of the pattern. This confirms the bullish reversal and signals that the price is likely to continue to rise.
Traders can set a stop loss below the second low of the pattern. This is the level at which the pattern would be invalidated, and the downtrend would likely continue. Setting a stop loss helps manage risk and limit potential losses.
Setting a Take Profit Target
Traders can set a take profit target based on the distance between the bottom of the pattern and the peak. This distance is known as the “measured move” and can be used to estimate how far the price is likely to rise after breaking above the peak.
To calculate the measured move, traders can subtract the low of the pattern from the peak and add this distance to the breakout point. For example, if the low of the pattern is at $100, the peak is at $110, and the breakout point is at $105, the measured move would be $15 ($110 – $100 = $10, $105 + $10 = $115).
Traders can set a take profit target at the measured move level or slightly below it to ensure they capture the majority of the potential price increase.
Managing the Trade
Managing the trade is essential to ensure that traders are maximizing their profits and minimizing their losses. One way to do this is to use a trailing stop loss. This is a stop loss that moves up as the price increases, locking in profits and reducing the risk of losses.
Traders can also monitor the price action and adjust their take profit target if necessary. If the price is showing signs of slowing down or reversing, traders may want to take profits early to avoid giving back too much of their gains.
The double bottom pattern is a popular chart pattern used by forex traders to signal a potential bullish reversal in a downtrend. Traders can use this pattern to enter a long position and take advantage of the potential price increase. To trade the double bottom pattern, traders should identify the pattern, enter a long position when the price breaks above the peak, set a stop loss below the second low of the pattern, set a take profit target based on the measured move, and manage the trade using a trailing stop loss and monitoring the price action.