Double bottom pattern is one of the patterns that we will learn this time. This pattern will resemble the letter W with a change in trend direction from down to up. For more details, you can read the article below. Before that, make sure to register yourself so you can enjoy the features of GIC and trade to get consistent profits!


Table of Contents


Understanding Double Bottom Pattern

The double bottom pattern is a bullish reversal pattern that occurs at the bottom of a downtrend and signals that sellers, who have been controlling the price action so far, are losing momentum. The pattern resembles the letter “W” because of the two-touched lows and the change in trend direction from a downtrend to an uptrend.
 
A double bottom occurs at the end of a downtrend. As price action moves lower, making a lower high and a lower low, it rebounds higher before going lower again to retest the previous low.
 
Since the basic rule of technical analysis is that a double bottom becomes a support level, sellers were unable to make a new low, below the previous low, which gave buyers the opportunity to push price higher. As a result, we have two lower lows - two lower lows - that resemble the letter "W."

 
On the other hand, the highest point of the rebound after the first bottom is considered to be the trigger of the pattern. A horizontal line is drawn at the highest point of the rebound, called the "neckline". Since it is almost impossible to get two lows at exactly the same price, as long as these two lows are at the same price, it is considered sufficient to validate a pattern.
Since this pattern is initiated by a downtrend and completed in an uptrend, the double bottom pattern is considered a bullish reversal pattern. The pattern becomes active after price action breaks above the neckline. Thus, price action shifts from a situation where it is creating lower lows and lower highs, to a situation where it is starting a trend of higher lows and higher highs.
 
It is generally considered that two consecutive lows with a short duration between their creation can be problematic, as this means that the downtrend is very strong, so the existing bearish trend is likely to continue. For this reason, the most effective double bottom patterns are those with a certain amount of time between the two lows.

Also read : 

Learn to Read Forex Chart Patterns

Characteristics of Double Bottom Pattern

Before we get into how to trade a double bottom, we should first become familiar with the characteristics of one. This will allow you to quickly and easily identify the pattern on the chart and will also help you understand the dynamics behind this powerful reversal pattern.



As you can see from the illustration above, a double bottom pattern has formed after an extended down move. The market found buyers at a key support level (the first bottom). Shortly after forming the first bottom, the market retested new resistance at the neckline and then found support again at the same key support level (the second bottom).
 
One common mistake among Forex traders is to assume that a double bottom has formed before the market actually confirms the technical pattern. How does the market confirm a double bottom pattern, you ask? Let’s take a look…
 





Notice in the illustration above that the market is now trading back above the neckline. This confirms the double bottom pattern breakout.

Requirements for the Double Bottom Pattern

Below are the conditions for the double bottom pattern itself. These conditions are:
  1. Identify two different bottom sections with the same width and height.
  2. The distance between the bottoms should not be too small - depending on the time frame
  3. Confirm neckline/resistance price level
  4. Use other technical indicators to support the double bottom bullish signal such as moving averages and oscillators.
  5. Beware of trading against strong trends
  6. Double bottom is a bullish continuation pattern.
  7. Previous uptrend of 30% or more
  8. Formed for a minimum of 7 weeks.
  9. Base Depth less than 40%
  10. The pattern commonly forms in volatile environments
  11. Volume should be running above average on the breakout. (30-40%)
  12. The second low must undercut the first low
  13. Optimal Buy Point is 10 cents above the middle peak in the W

Double Bottom Pattern Example

Bajaj Finance Ltd (BAJFINANCE): Recently, the counter has shown a reversal from two different levels – Rs 3,886 and Rs 3,880 – as per the daily chart. This reversal shows a “Double bottom” pattern, which crossed the break-out neckline at Rs 4,040 decisively.

Typically, a breakout candle should have higher volume, which is true in this case.





When identifying a double bottom on a chart, the previous trend should be a downtrend. The first bottom is formed as a U-shaped pattern. Similarly, the second bottom is formed as a U, both bottoms have the same or nearly the same low.

The formation of this pattern is confirmed when the price breaks through the neckline resistance level and continues to move up. Also the volume will increase when the price breaks through the resistance. Example:
We can see an example of a Double Top chart pattern formed on the daily chart of Tata Motors Ltd.


Stop Loss and Price Target: The minimum target is the vertical distance from the top of the M or W, to the neckline after the breakdown. Usually one can place a stop loss above the neckline and take a short trade when the neckline breaks.
 
With the reversal pattern, the stop is usually placed below the neckline and a long trade is taken as the neckline is broken on the upside with high volume. The double top and bottom formation is very effective when identified correctly on the chart.
 
However, you may incur losses if interpreted incorrectly. So, one should be careful and patient before trading this chart pattern.

How to Read Double Bottom Pattern

First and foremost, any potential targets must first be identified using simple support and resistance levels. This is true regardless of the price action pattern that has formed. That being said, there is a way to identify potential targets when trading a double bottom pattern. It is called a “measured move” or “measured move objective,” and the concept is easy to understand.
 
To find the measured move objective for a double bottom pattern, you simply take the distance from the two bottoms to the neckline and extend that same distance to a higher future level in the market. Let’s see how we would measure this objective using the example of NZDUSD.




On the chart above, the distance from the double bottom to the neckline is 170 pips. Therefore we will measure an additional 170 pips above the neckline to find our measured objective. One final point about the measured move on this chart. If we zoom out, we can see that the measured objective is actually in line with previous levels in the market. This will give us more confidence that the objective is accurate.



Notice how our measured objective of the double bottom low (170 pips) lines up perfectly with previous support levels in the market.

Trading Benefits Using Double Bottom Pattern

There are several advantages to using double bottom and double top patterns in the financial markets. First, as you have seen above, they are relatively easy to spot. You just need to make a visual assessment and use the trendline tool offered by your forex trading platform to draw them. Second, it is easy to combine other trading tools when using double tops and double bottoms.

As you can see above, we easily incorporate the concept of Fibonacci retracement. Also, it is relatively easy to use technical indicators such as the Relative Strength Index (RSI), momentum, and the Relative Vigor Index (RVI). Third, although double tops and bottoms are not always accurate, they often lead to positive results. This is because the concept is already ingrained in the minds of other financial traders.

The double bottom pattern is one of the strongest reversal patterns out there. Because it consists of two bottoms, it is not a very common pattern. However, once identified, it is very effective in predicting a change in trend direction.

Its greatest strength is that it offers clear levels to play. The neckline marks the risk and helps determine the take profit once the pattern is activated. Therefore, the correct double bottom drawing is very important. After learning about this double bottom pattern along with other related things, it is expected that you will learn other patterns from GIC such as Head and Shoulders Pattern: Characteristics, How to Read, and Examples of Patterns.