A double-bottom reversal is a bullish pattern that might signal a downtrend’s end.
As the name suggests, two price troughs at about the same point define a double-bottom pattern.
What is a double bottom?
A double bottom is a pattern of bullish chart in the shape of a “W.” The value successively makes at about the same rate two troughs (lowest points), suggesting significant support.
This pattern of chart shows investors ‘ determination not to allow the price to reach new lower levels and their willingness to reverse the current trend.
NB: You can also create this chart pattern in the form of “WV” or “Triple Bottom.”
At the end of a downtrend, the double bottom chart pattern is found and is similar to the letter “W” (see chart below).
Price drops to a new low and rallies slightly higher before going back to the new low.
Incapable of pushing price to a new low to keep the downtrend going, sellers give up and the price bounces sharply from this zone.
A break in the key price level at the high point between the ‘ bottom ‘ resistance level (neckline) specifies the bullish confirmation.
How is works/Example of a Double Bottom
The double-bottom chart pattern is one of the most common chart patterns, closely resembling the letter “W.”
When prices record two distinct lows on a chart, this “W” pattern forms, as illustrated in Figure 1 below with Bottom # 1 and Bottom # 2.
The second bottom can be rounded, depending on technical analysts or “chartists,” while the first bottom should be distinct and sharp.
The pattern is complete when prices rise above the formation’s highest level.
The highest point is named “point of confirmation.”
Usually, the volume of a double bottom on the left of the bottom is greater than on the right.
Volume is usually down as the pattern shapes and accelerates as the pattern hits its lows.
When the pattern completes, volume increases again, punching through the confirmation point.
Double Bottom Buy Signal
It is possible to draw two horizontal lines; one intersects the two troughs across the bottom of the chart, while another can be drawn along the top by the highest price point.
A buy signal is generally viewed as a breakout to the top of the upper line.
As always, it is necessary for us to remember that higher trading volume follows the breakout.
This should reduce the likelihood that we will act on a false breakout.
A common method of double-bottom trading is to enter a long trade, putting a stop below the previous low as defense against reversal.
One profit target can then be set at the level of resistance and a second profit target can be set at twice the distance between resistance and support seen in the double bottom formation.
Spotting double tops and double bottoms is an easy-to-learn and necessary skill for traders searching for a visual guide for market trends forecasting.
Traders should be looking for the formation of the familiar M and W patterns in the charts that can signal the end of an upward or downward movement and a reversal of prices that are likely to continue for at least the height of the emerging double-top or double-bottom pattern.
- The Double Bottom signals the downward trend may have fallen and the price may have moved higher.
- You can use multiple time frames to boost your reversal trade accuracy.
- Don’t buy a Double Bottom in a strong downward trend (when the price is less than 20MA).
- If you want to trade the Double Bottom Breakout, wait for a buildup at the neckline to form so that you have a favorable risk of rewarding.
- The False Break strategy can be used to take advantage of “trapped” traders.