What Is The Double Bottom Chart Pattern?
A Double Bottom is a bullish chart pattern, commonly found at the “bottom” of a trend ahead of a reversal.
A double bottom resembles a “W” shape and includes two roughly equal sized troughs.
The reversal is typically confirmed with a break of neckline resistance.
How To Identify The Double Bottom Pattern?
Price action must meet a support trendline two times to form consecutive troughs roughly equal in size.
These troughs are separated from one another by a peak that meets a resistance trendline. This results in a “W” shape.
What Is The Psychology Behind The Double Bottom Pattern?
The Double Bottom pattern is a bullish chart pattern that can provide traders with valuable insights into the market’s psychology.
It’s characterized by two consecutive troughs (the bottoms) of approximately the same height, with a peak in between (the top).
The pattern typically takes several weeks or months to form and is a sign of a potential trend reversal.
Traders interpret the pattern as a sign of a transition from a bearish market sentiment to a bullish market sentiment.
The pattern represents a period of indecision in the market, where buyers and sellers are evenly matched, but ultimately buyers gain momentum and push the price higher.
The psychology behind the double bottom pattern is that the first trough represents a period of strong selling pressure, where sellers are in control and pushing the price lower.
However, buyers eventually step in and push the price higher towards the peak. The peak represents a period of indecision in the market, where buyers and sellers are unsure of the direction of the trend.
As the pattern continues to form, the price moves lower again towards the second trough. The second trough represents a retest of the previous support level, where buyers are in control and pushing the price higher again towards the peak.
Once the price breaks above the peak, it’s a signal that the trend has reversed, and traders may enter long positions.
How To Trade The Double Bottom Pattern?
To trade the Double Bottom pattern, traders typically wait for the price to break above the peak with a strong volume surge.
The breakout should ideally occur on higher than average trading volume, as this confirms that there is significant buying pressure behind the move.
Traders may enter a long position once the price breaks above the peak, with a stop loss placed below the second trough.
The profit target can be set based on the height of the pattern, with the expectation that the price will move at least the same distance as the pattern’s height in the direction of the breakout.
Alternatively, traders may wait for a pullback to the peak before entering a long position. This approach can provide a better risk-to-reward ratio, as the entry price is closer to the peak, and the stop loss can be placed tighter.
However, it may also result in missing out on some of the initial gains from the breakout. Ultimately, the best approach will depend on the trader’s risk tolerance, trading style, and market conditions.
It’s worth noting that the double bottom pattern can also result in a false breakout, where the price briefly breaks above the peak before reversing course.
Double Bottom Performance Expectations Explained
A bullish pattern is usually expected to emerge as soon as the upper trendline is breached.
However, the potential target can vary from 35% to 69% depending on the nature of the troughs (Adam or Eve).
To calcuate, measure from the bottom to the top trendline and then project your measurement.