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Forex review blog for you

My Forex review blog for you

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The Double Bottom Pattern Trading Strategy Guide

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You’ve probably seen headlines like these…

“Dow plunges 1000 points, erases gain for 2018!”

“Oil heads for seventh weekly loss on signs of global supply glut”

“Bitcoin crashes, now what?”

And you think to yourself…

Is this a good time to buy?

Well, not so fast.

Because the last thing you want is to catch a falling knife.

Instead, a better approach is to identify the Double Bottom pattern so you can pinpoint market reversals with deadly accuracy.

But first…

What is a Double Bottom Pattern and how does it work?

A Double Bottom Pattern is a bullish trend reversal pattern (and we call the opposite a Double Top).

It has three parts to it:

  1. First low – first price rejection
  2. Second low – second price rejection
  3. Neckline – an area of resistance

Now you’re probably wondering:

“What does a Double Bottom pattern indicate?”

I’ll explain…

First low – The market bounces higher and forms a swing low. At this point, it’s likely a retracement in a downtrend.

Second low – The market rejects the previous swing low. Now, there’s buying pressure, but it’s too early to tell if the market could continue higher.

Break of neckline – The price broke above the Neckline (or Resistance) and it signals the buyers are in control — the market is likely to move higher.

In short, the Double Bottom Pattern signals the downtrend has possibly bottomed out, and the price is about to move higher.

Here’s what it looks like:

Seems easy, right?

But before you trade the Double Bottom pattern, you want to avoid this common trading mistake…

Don’t make this mistake when trading the Double Bottom pattern…

So what is it?

Well, many traders buy the break of the neckline after a Double Bottom is formed.

But watch out.

Because if the market is in a strong downtrend and it forms a “small” Double Bottom, then chances are, the market is likely to continue lower.

So how do you avoid it?

Here’s how…

  1. Add the 20-period Moving Average (MA) to your chart
  2. If the price is below the 20MA, don’t buy the Double Bottom

Here’s an example:

Now you’re probably wondering…

“Then how do I trade the Double Bottom pattern?”

Well, that’s what I’ll cover next.

Read on…

The False Break: How to trade the Double Bottom Pattern and profit from “trapped” traders

Now…

When you trade the Double Bottom, you must pay attention to the time and space between the lows — the larger the “gap”, the better.

Why?

Because when the lows are far apart, it gets the attention of more traders who could push the price higher.

Here’s what I mean…

And with this concept, you can use it to profit from “trapped” traders.

Here’s how…

  1. The first and second lows should have time and space between them
  2. Let the price break below the first low
  3. Wait for a rejection of lower prices and then go long

An example:

The idea is simple.

As the price breaks below the first low, bearish traders will short the markets and have their stops above the lows.

But if the price quickly reverses higher, the short traders are “trapped”.

And you can take advantage of it by going long, anticipating if the price moves higher, it’ll trigger their stops and push the market in your favor.

Does it make sense?

Great!

Then let’s move on…

The Double Bottom Breakout Technique

Here’s the thing:

You don’t want to “chase” a breakout after the Double Bottom is formed because the price is likely to reverse lower.

Instead, you want to see strength from the buyers before buying a breakout.

Here’s how…

  1. Identify a potential Double Bottom
  2. Let the price to trade break above the previous swing high
  3. Wait for a weak pullback to form (a series of small range candles)
  4. Buy on the break of the swing high

Here’s an example:

Now, this is a powerful technique for two reasons…

Higher probability trading setup

You’re not catching a falling knife. Instead, you let the price break above the previous swing high to show strength from the buyers.

Favorable risk to reward

When there’s a weak pullback, it tells you there’s a lack of selling pressure. Also, you can set your stop loss below the swing low which offers a better risk to reward.

Now you might be wondering…

“But what if there’s no pullback, and the price makes a sudden breakout without warning?”

Well, that’s what I’ll cover next.

Read on…

Don’t chase the markets, do this instead…

Now:

If the price makes a sudden breakout, the last thing you want to do is “chase” the market.

Why?

Because you don’t have a logical place to set your stop loss, and you’ll likely get stopped out on the pullback or reversal.

So, what can you do?

You wait for the re-test of the breakout level.

Here’s how…

  1. If the price makes a sudden breakout, wait for it to re-test previous Resistance turned Support
  2. If there’s a re-test, wait for a bullish reversal candlestick pattern to form
  3. If there’s a bullish reversal candlestick pattern, go long on next candle with stops 1 ATR below the low

Here’s what I mean…

Pro Tip:

Sometimes, the market might not re-test the level you’re looking at.

Instead, it’ll form a Bull Flag chart pattern (which is another setup you can trade).

If that happens, you can go long when the price breaks above the Bull Flag and have your stops 1 ATR below it.

How to pinpoint Double Bottom reversals with deadly accuracy

Here’s the deal:

Not all Double Bottom are created equal.

You can have two identical Double Bottom pattern, but one has a high probability of reversal, and the other is likely to fail.

So now the question is, how do you filter for the high probability pattern?

Well, the answer is…

Multiple Timeframes.

Here’s how it works…

  1. Identify a higher timeframe Support area
  2. Go down to a lower timeframe and look for a Double Bottom pattern that leans against the higher timeframe Support

Here’s an example:

On the higher timeframe, the price is at Support area…

On the lower timeframe, you get a Double Bottom pattern…

Now…

You can combine this multiple timeframe analysis with the entry techniques you’ve learned earlier — you’ll realize your reversal trades will dramatically improve.

This is powerful stuff, right?

Conclusion

So here’s what you’ve learned today:

  • The Double Bottom signals the downtrend has possibly bottomed out and the price could possibly move higher
  • Don’t buy a Double Bottom in a strong downtrend (when the price is below 20MA)
  • You can use the False Break technique to profit from “trapped” traders
  • If you want to trade the Double Bottom Breakout, wait for a buildup to form at the neckline so you have a favorable risk to reward
  • You can use multiple timeframes to improve the accuracy of your reversal trades

Now, it’s your turn to share…

How do you trade the Double Bottom Pattern?

Leave a comment below and share your thoughts with me.






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