Double Bottom Strategy: Catching Reversals

Overview

The double bottom is a classic reversal pattern: two distinct lows at roughly the same price, separated by a swing high (the "neckline"). It signals that sellers failed twice to push price lower — demand is taking control. The trade triggers when price breaks above the neckline.

Setup

Instruments: stocks, forex pairs, crypto
Timeframe: 4-hour or daily (more reliable on higher timeframes)
Pattern structure: two lows within 1–3% of each other, ≥ 5 bars apart
Indicators: neckline (the swing high between the two lows), volume, RSI(14)

Entry rules

Identify two distinct lows at roughly equal price
Mark the swing high between them as the neckline
Wait for a daily close above the neckline
Confirm with above-average volume on the breakout candle
Enter at the next bar's open, or on the neckline retest

Stop loss rules

Stop: below the lower of the two bottoms, or 1 × ATR(14) below entry
Tighter option: below the breakout candle's low
Maximum risk per trade: 1% of account

Take profit rules

Target 1: measured move — pattern height (bottom to neckline) added to the breakout
Target 2: prior major swing high
Scale out: 50% at target 1, 50% trail under a 20 EMA
Minimum RR: 2:1

Risk management

Parameter	Value
Risk per trade	1% of account
Max concurrent reversals	2
Position size	Risk ÷ (entry − stop)
Volume filter	Breakout volume > 1.5× average
Time filter	Skip if second bottom takes > 30 bars to form

Validate sizing with the position size calculator and the risk-reward calculator.

When it fails

The "second bottom" is actually a continuation of the downtrend — confirm RSI bullish divergence at the second low
Breakout fails and price falls below both lows (a "triple bottom" or trend continuation)
Trading double bottoms against a powerful higher-timeframe downtrend

Key principle

The double bottom is about failed selling: bears tried twice and failed. Wait for the neckline break — don't anticipate at the second low. Volume confirms that buyers have arrived.