The double bottom chart pattern is by far the most misunderstood by new traders. More than 70% of traders frequently miss out on the trading opportunity provided by the double bottom pattern.
Table of Contents
- How does the double bottom pattern appear?
- Why does the double bottom pattern work?
- How to Trade the Double Bottom Pattern?
- What does the triple bottom pattern mean?
- Double Bottom Chart Pattern FAQ’s
But if you know how to trade double bottom patterns, you can have a very high probability trading setup with accuracy of stop loss and target levels. If price action is said to be the king of trading, then double tops and double bottoms are certainly no less than dukes.
It is necessary to investigate the double bottom pattern technically, but it is much more vital to discuss practical trading rules and how to use the double bottom chart pattern in your trade setup.
This blog will teach you everything you need to know about double bottom patterns, as well as a double bottom pattern trading strategy for the best trading results.
So now it’s time for actionable learning. Let’s start…
How does the double bottom pattern appear?
To analyze the formation of the double bottom, we must examine the following key points:
Trend Reversal :-
A double bottom pattern is a bullish trend reversal pattern, which means that a downtrend must exist prior to the formation of the pattern’s first low. The longer the downtrend, the more reliable the double bottom (if a valid pattern emerges after the downtrend).
First Low :-
Prices begin to reverse from a downward trend when sellers are fatigued and the bulk of selling are recording profits. A swing low appears, and prices rise sharply to a point that is at least 15% or greater of the total fall.
Second low :-
Following the formation of a peak, prices fall to around the initial swing low and encounter buying pressure to rise higher, establishing a second low.
A neckline is a line drawn from a price level or area of value near a peak. It is critical to clearly define the neckline because a price breakout from the neckline is the first sign of a bullish reversal.
Once prices break out from the neckline, a double bottom is clearly visible with a ‘ W ‘ formation.
A very common phenomenon that most traders overlook is the possibility of price retracement after a breakout from the neckline; this retracement to near the neckline and reversal is often a very good entry point, which we will discuss in detail shortly.
In the above example, the Nifty 50 is forming a double bottom, and the breakout from the neckline occurred with a breakaway gap. After one day, prices retested the neckline level with a long-legged candlestick, signaling a further advance from the level.
Why does the double bottom pattern work?
One of the most important technical analysis concepts is that “technical analysis is an art, not a science.”
Keeping this in mind, you should always examine any pattern, chart, level, or price action in relation to what the majority of traders are doing.
This pattern could play out, but why should it?
You must understand the reasoning behind it in order to trade this pattern effectively and logically.
So, what are the different phases of pattern formation and what do they mean?
Phase -1 :
Prices are in a downward trend, and everyone wants to jump in and join the rally.
Phase -2 :
Some of the traders who participated in the very early want to book their profit before it is too late, and they are afraid of leaving profits on the table. This tendency reduces selling momentum, leading prices to rise until all profits have been booked.
This procedure is sped up as a result of several stop loss orders activating at the same time for orders placed lately.
Phase -3 :
After the market has absorbed all of the purchasing pressure, phase 3 begins, which is selling by those who feel the market is still in a decline and the pause in buying gives them confidence to short sell. This signals the start of a sell-off until the prior low is hit.
Phase -4 :
Keep in mind that at this point, two scenarios are possible, which will determine the next step. The first scenario develops when prices break below the previous low with momentum and more short sellers join the downtrend, invalidating the double bottom pattern and turning it into a bearish continuation. The second scenario develops when the market is unable to push prices lower than the previous low, activating new buyers in anticipation of a reversal. In the second scenario, prices move high and confirm phase 4.
Phase -5 :
Once the breakout from the neckline occurs again, there are two possibilities that will determine whether or not the double bottom pattern is in place. If prices approach and break through the neckline, which becomes a support, dropping below the neckline invalidates our pattern, but if prices reject this support level and climb higher, the double bottom pattern is validated.
Phase -6 :
A confirmed pattern propels prices higher, and a bullish reversal is stated to be in place now. The price increase may not be especially forceful, but it is normally the start of an uptrend.
How to Trade the Double Bottom Pattern?
If you understand the workings of the pattern as explained in the previous section, you will have no trouble trading it.
To trade patterns with accuracy and good risk reward, it is critical that you analyze the current phase of pattern formation as stated clearly in the previous section.
Once you understand which phase market is in accordance with pattern formation, it will be easier for you to place the trade at the right time.
One of the most common mistakes is trading before the pattern has fully unfolded. This happens because traders do not recognize the current state of the market.
Let us now concentrate on entering the trade; ideally, you should enter after phase 5 confirms – confirmation can take the form of a single candlestick or multiple candlesticks showing rejection of neckline support.
If prices do not immediately return to neckline support and continue to rise, it is best to wait for a retracement before entering the trade (remember that prices and markets do not move in straight lines, and retracement is the best way to enter a trade).
The stop loss comes next. If prices do come to support at the neckline, your stop loss should be 1 ATR below the neckline.
(ATR is the best way to adjust stop loss as per volatility).
If prices do not come to the neckline and the next retracement entry is in place, you can again place your stop loss 1 ATR far from the level from which the prices retrace.
For Target, you can use two methods :-
1. Width of the peak projected upwards from the point of entry.
2. Risk reward ratio of 1:3 or more depending upon your trade goals ( usually prefer 1:3 )
What does the triple bottom pattern mean?
The triple bottom pattern occurrence is very infrequent, but if you know how to trade the double bottom pattern, trading the triple bottom pattern will be simple. Since a triple bottom pattern is similar to a double bottom pattern, the only difference is one more swing low.
Trade objectives, entry, and exit will be the same as in a double bottom pattern. It is important to note that the third low formation does not always coincide with the level of the first two lows. If the third low formation is somewhat higher than the previous two lows, it is a genuine triple bottom pattern.
- The double bottom pattern is a bullish trend reversal stock chart pattern.
- Gives an idea of market trend reversal in the medium to long term.
- Retracement to neckline support is fairly typical phenomena.
- To trade double bottom with high accuracy, you should always confirm the formation phase before entering and always avoid “jumping the gun” error.”
- In the case of a double bottom pattern, the stop loss should be positioned 1 ATR below the neckline support or below the first rejection following the breakout from the neckline.
- Triple bottom patterns are just extension of double bottom patterns.
- Double bottom chart pattern plays an important role when it comes to technical analysis of stocks, forex and commodities.
Double Bottom Chart Pattern FAQ’s
What does double bottom pattern mean?
Double bottom pattern shows possibility of bullish reversal
What is the difference between double top and double bottom pattern?
Double top appears at the top of an uptrend and signals bearish reversal while double bottom appears at the end of a downtrend and signals bearish reversal.
Is double bottom pattern reliable?
Double bottom pattern can be reliable if you know when to place entry.
What is triple bottom, how it differs from double bottom pattern?
Triple bottom pattern is just the extension of double bottom and should be traded in same way as double bottom pattern.
Does double bottom pattern work for stocks?
Double bottom pattern works same for stocks, forex commodities, crypto or any other instrument.