Exit strategy

As you may have noticed, not all double bottom patterns materialize but when they do the returns can be substantial. In order not to lose your shirt, you have to establish a few trading rules that you, the trader, should follow.

When you enter the trade, you should set a stop-loss order (aka protective stop) at the same time so that you can exit the trade automatically when things go south and the losses are still small. It is extremely dangerous to let the stock go down especially when it is already in a downtrend. Once the stock climbs up, you can move the stop higher to protect your profits. It should be noted that if the stock gaps open to the downside, a protective stop order will get filled at a price significantly lower than the one that was set. So be aware that a stop order does not fully protect you against price drops. Since dramatic gapping can happen after a company releases its earnings report, it is a good idea to think twice about entering a trade prior to a company news release (of the financial type) unless you know a lot about the company.

Before you enter the trade, you should also know at what price you will sell the security (at a profit, hopefully). If you don't have a plan and the stock climbs, greed takes over and there is a tendency in everybody to think more profits can be made and stay in the trend (usually too long). It is better to leave the trade as planned even if you are missing out on some profits.