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”.
What Is a Double Bottom Pattern?
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.
What Does The Double Bottom Tell You?
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, what brings the price to a halt is a level known as support. 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 relative equal lows, the result is a double bottom pattern.
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 are attained.
An important piece of information to keep in mind is that these 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 retest of the neckline before a buy order is opened.
Stop-loss Placement
The most important variable in any trading system is the stop-loss, capital should always be protected.
For the double bottom pattern, your stop loss should be placed below the second low.
As seen in the chart above, I placed the stop loss slightly beneath the second low.
Profit Target
To calculate your take profit, the pip-count between the second low and the neckline is calculated.
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.
On a forex chart, find two equal lows with relatively the same height. Next, ensure a candlestick closes above the neckline before executing an order. A stop-loss must be placed below the second low.
The double bottom pattern is quite accurate when some rules are observed. The first is to always ensure the second low is equal to or higher than the first.
Further, a neckline break confirms the double bottom pattern so it has to be waited for.
Summary – Double Bottom Pattern
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, it is important to wait for the price to break the neckline before executing a trade.
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