In technical analysis double bottom pattern represents a bullish reversal formation which often may be prelude to a reversal in price action. Its opposite is the double top pattern, a bearish reversal formation.
The manifestation of this formation usually is prelude to a change in price momentum. Often, the pattern is identified in a bear market, who starts to show potential signs of strength.
Breakdown: what is a double bottom chart pattern
The double bottom is one of the most traded and known traditional chart pattern in technical analysis. Graphically, it appears like a “W” figure on chart.
Look at the following example of a double bottom in forex market:
Generally, double bottom chart patterns are identified whenever there are three elements:
- First low (point A);
- Second low (point C);
- Neckline – the pattern’s validation level identified by the resistance in point B;
What does a double bottom indicate? The psychology behind this technical analysis tool
Technical analysis relies on psychology and price action is the result of traders’ expectations and buy/sell decisions.
The same applies for a double bottom reversal formation.
Look at this example in forex market (EURJPY currency cross):
The appearance of a first low (point A) spot a bottom in the market, representing a support area. There, buying pressure push price back until a relative high is identified in point B.
After this point, price action resumes in the main direction. Sellers, nonetheless, are not able to break below previous support level: a second bottom appear in the market.
Lastly, when price breaks above the resistance identified by point B, the pattern is completed, and price reverses its action.
How to trade a double bottom pattern
How do you trade a double bottom pattern? There isn’t a unique answer. It depends on price action and breakout’s strength. Also, context is crucial to improve the overall winning rate.
Double bottom breakout
The double bottom chart pattern is completed once price breaks above previous high (point B). Instead, whenever price breaks below the two lows, the pattern is invalidated (we talk about double bottom invalidation).
Even though this definition is quite simple, breakouts are not all equals.
Sometimes market experience a strong breakout, other times instead price starts to form narrow candles of consolidation (signals of market indecision) until a major candle moves price forward:
In both cases however, we can expect price action to retrace a little bit after a breakout, to re-test the invalidated neckline of resistance (now turned in support). This is the so-called “magnetic” action of support and resistance areas (I’ve already talked about it in this article).
The double bottom trading strategy – entries, targets and stop loss
Look at the example in the picture below:
When price action re-test the neckline, the appearance of a candlestick pattern as signal of price repulsion (like a doji) can be a strong entry reason.
Once entered, an expected target should be at least equal to 1:1 projection of the distance between point A and B, according to Mark Andrew Lim.
Stop loss instead, must be placed beyond the resistance drawn between A and C. Personally, I like to set my stop loss equal to this level + 1 ATR (Average True Range). By this way, you can consider volatility and possible sudden spikes in price.
The role of context in double bottom trading
Double bottom formations are not infallible. We cannot assume that they are 100% profitable. Indeed, sometimes these patterns are invalidated by price action.
Context may help us to avoid false signals in the market.
For sure, a double bottom reversal pattern works best in contexts like this:
Rather than on these:
Think in terms of buying and selling pressure. If bottom points A and C appear on a major zone of support (nearby a cluster of buying pressure), price action will likely reverse its action, confirming the reversal signal.
Rather, if the relative high B appear nearby a major resistance, odds that price action will break above this level decrease. This area represents an important zone of selling pressure: the unbalance in market forces may cause price to prosecute in its downside movement.
Multiple timeframe analysis
PRO TIP: Try to use a multiple timeframe approach. On a higher level, it would be easier for you to find out major levels o support and resistance in the market.
How to identify a double bottom chart pattern in forex, crypto and stocks markets: Finviz and Tradingview screeners
Financial markets consist in thousands on instruments.
That’s why stock screeners exist.
A screener is an online tool that traders can use to filter financial instruments looking for opportunities in the market. Here, I would like to present you two free resources you can use right now: tradingview.com and finviz.com (specific for US stocks market).
Tradingview.com provides you with thousands of ideas. To search for a double bottom, just click on “ideas”, then select “chart pattern” and “double top or bottom”:
Finviz it’s another great free resource, even if it has one big limit: it works only for the US stock market. To use this screener, simply reach the “screener” tab on finviz.com, then click on “technical” and select “Double bottom” on the “Pattern” menu:
Conclusions – Key takeaways
In conclusion, let’s recap the main takeaways of today’s article:
- Double bottom is a traditional reversal chart pattern which usually appear after a downside movement;
- The manifestation of the pattern may be prelude to a change in price momentum;
- Graphically, a double bottom appears like a “W” figure;
- Double bottom pattern is completed once price action breaks above neckline;
- Price usually re-test neckline once broken;
- Context is crucial in the identification of a successful double bottom;
- Market screeners like tradingview.com and finviz.com may help you in find good opportunities in the market.
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