Profit from Double Bottom Patterns: The 2024 Traders Playbook

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how to trade double bottom pattern

This chart pattern describes the reversal of on-going bearish trends. Now, a Double Bottom Pattern is a bullish trend reversal pattern (and we call the opposite a Double Top). By the time price has reached the neckline, a large part of the swing how to trade double bottom pattern is over, which means a retracement is likely to begin. Usually, this’ll come after price breaks above the neckline (setting up a retest entry), but sometimes it’ll take place before – causing your trade to enter drawdown if you get in.

how to trade double bottom pattern

Double Bottom Pattern: A Trader’s Guide

In fact, this pattern appears so often that it alone leads some to think they’re proof that price action is not as wildly random as many academics claim. Price charts simply express trader sentiment and double tops and double bottoms represent a retesting of temporary extremes. If prices were truly random, why do they pause so frequently at just those points? To traders, the answer is that many participants are making their stand at those clearly demarcated levels. A double bottom pattern is a stock chart formation that indicates a bearish-to-bullish price trend reversal, used in technical analysis, commonly to trade stocks, forex markets, or cryptocurrencies.

how to trade double bottom pattern

The Direction of the trend

While the double bottom is one of the more common chart patterns out there, you won’t find them forming every day – it is a trend reversal pattern after-all. However, in all of the cases, when traders identify a double bottom formation, they wait for the asset’s price to break above the neckline and only then take a long position. To help you see how double bottoms look in reality, we are going to show you two examples. The double bottom pattern is a bullish reversal chart pattern that occurs at the end of a downtrend and signals a possible trend reversal. The exact level for stop-loss depends on your risk tolerance, but it can range from 15 to 30 pips below the neckline. Any move and close below the neckline invalidates the activated double bottom pattern.

  1. The banks have made most of their profit by now, so they often take the market in the other direction for a while to re-set traders expectations about the future, like I explained earlier on.
  2. That pushes price even higher – as you close a short trade by buying back what you sold – and ultimately leads to the trend reversal we see.
  3. A double bottom pattern is often seen as a bullish sign, as it indicates that the asset may be ready to start a new uptrend.
  4. Because when the lows are far apart, it gets the attention of more traders who could push the price higher.
  5. Trading based on technical analysis is a popular way for traders to identify market opportunities.

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Basically, a double bottom pattern indicates that sellers can no longer push prices down. In this case, the asset’s price can’t break below a certain level and a bullish trend reversal is likely to occur. The key limitation of the double bottom pattern is that it is a contrarian strategy.

When most traders trade in the same direction, such as in a long downtrend, the banks can’t make money because no-one is losing; everyone is profiting from the trend. First, we have a downtrend or strong down movement, so most traders are currently selling. The two lows that created the double bottom don’t need to form at the same price. I’ve seen some guru’s – and books actually – say a pattern with a bottom that peaks below the 1st bottom isn’t a real double bottom, which isn’t true. During a downtrend or large downmove, price finds support, then reverses and begins rising. After a small reversal, price falls back to roughly the same price as the first bottom, where it reverses again (bottom 2) and initiates the start of a new trend – or large counter-trend movement.

Identifying the double bottom should, in theory, be done easily with the help of the criteria you’ve been presented with. However, in the heat of the moment, you don’t have the benefit of hindsight, which will make it somewhat more difficult. You may reference the image above where each point has been marked for convenience.

The double bottom pattern’s alternative names are a “double bottom reversal” or “twin bottom pattern”. But its punch might differ depending on how wild the market swings and how easily stuff gets traded. They give the pattern space to breathe, making it less jumpy and easier to spot from the noise of shorter timeframes. Imagine a boxer, rocked by two knockdowns, but somehow rising with renewed fury. The double bottom, with its distinctive “W” on the chart, isn’t just a squiggly line; it’s a story told in price movements.

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