The double-bottom pattern is a trusted tool in technical analysis that spans several trading arenas, including double-bottom forex trading, double-bottom crypto trading, or double-bottom stock trading.
This pattern is marked by two consecutive troughs or “bottoms” that form approximately at the same level, demonstrating a significant support level.
In this article, we will thoroughly explore the double bottom pattern, its formation, its confirmation, how it can be traded, the different types, and more.
We will also touch upon its variations, like the inverted double-bottom pattern.
What Is a Double Bottom Pattern?
The double pattern is a classic chart pattern that indicates a bullish reversal. Found at the end of a downtrend, it emerges and shifts the market structure to the upside.
This chart pattern is characterized by two lows of nearly equal lengths, looking similar to the English alphabet “W.”
After a prolonged downtrend, there’ll be a time when the bears (sellers) start to weaken. When this happens, the double bottom pattern might form to fully stop bearish pressure.
This pattern forms when the price struggles to break a level called “support”. The price tests this level of support twice.
If this level holds, the result is an appearance of a double bottom formation. During this action, the price made a high that is called a neckline.
To simplify this, a detailed illustration is given in the image below.
In short, the double bottom consists of two lows and a single neckline. The neckline happens to be the most important feature of the double bottom.
Side note: this chart pattern is more accurate when the second is higher than the first.
Varieties of Double Bottom Pattern
There are several variations of the double bottom pattern that traders should familiarize themselves with:
- Standard Double Bottom: The basic form of the pattern, characterized by two lows at approximately the same price level.
- Double Top and Double Bottom: These patterns are the inverse of each other. While the double bottom signals a bullish reversal with its ‘W’ pattern, a double top suggests a bearish reversal, forming an ‘M’ pattern on the chart.
- Adam and Eve Double Bottom: This variant features the first bottom as a sharp and sudden low resembling a V shape (Adam), while the second bottom forms more gradually and appears rounded, resembling a U shape (Eve).
- Double Bottom Breakout: In this pattern, the price breaks through the neckline, confirming the bullish trend.
What is The Meaning of a Double Bottom Pattern?
A financial market is in a downtrend when lower highs and lower lows are being created. Eventually, sellers slowly start to weaken.
In some instances, a level known as support brings the price to a halt. Support is a relevant price level that reverses the direction of a currency pair moving to the upside.
When the price hits a resistance twice, forming relatively equal lows, the result is a double bottom.
A new lower low was not created, showing indecision in the marketplace. Thereafter, a strong push upwards past the neckline switches the trend.
The double bottom pattern shows that sellers are slowly packing their bags. Bit by bit, bullish momentum rose higher and higher prices were attained.
An essential piece of information to remember is that this pattern holds more value when it appears at the end of downtrends.
How To Trade The Double Bottom Pattern
Double bottoms form at the end of the down-trending market and shift the market structure to the upside.
To trade this chart pattern, its neckline has to be drawn. After the first low of the double bottom is completed, a retrace occurs.
This forms a high between the two lows (bottoms); a vertical line is drawn on top of this high is regarded as the neckline.
Once the neckline has been drawn, orders can now be placed once the neckline is broken. However, more conservative traders wait for a neckline retest before opening a buy order.
Stop-loss Placement
Stop-loss is the most crucial variable in any trading system; capital should always be protected.
Your stop loss should be placed below the second low for the double bottom.
As the chart above shows, I placed the stop loss slightly beneath the second low.
Profit Target
The pip count between the second low and the neckline is calculated to calculate your take profit.
Often, the price tends to blast past this target, so a trailing stop can be placed once it’s hit or partials are taken.
Is The Double Bottom Pattern Bearish?
The double bottom, unlike its counterpart, the double top, is not a bearish pattern.
On the other hand, the double bottom is a bullish reversal pattern. This chart pattern appears at the end of downtrends shifting market structure to the upside.
READ MORE: How To Trade The Triple Bottom Pattern
Summary
The double bottom pattern is a chart pattern that is very easy to identify. Although, they should only be traded when they appear at the end of a downtrend.
Furthermore, it has to be ensured that this pattern is traded properly. A trait of a good forex trader is to be reactive rather than predictive.
With this in mind, waiting for the price to break the neckline before executing a trade is essential.
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