Double Bottom Pattern-Chart Pattern analysis: Part 2

The Double Top pattern is one of the best chart patterns used by traders to identify potential reversal of a downtrend in the financial market. The double bottom pattern gives the opportunity to buy a financial instrument at the lowest possible price. If a trader can identify a double bottom pattern perfectly, he can take full advantage of the upcoming uptrend. Buying a share at the beginning of an uptrend is the best place to buy because the price is extremely low there because of the previous downtrend. Furthermore, if a trader buys shares at the beginning of an uptrend, he can profit quickly from those shares. So it is significant for traders to master this pattern.

Double bottom is a reversal chart pattern that is mostly found at the end of the downtrend. At the end of a downtrend, when the price makes a low, rebound, hit a similar low again, and get rejected from there, a W-shaped pattern forms, known as a double bottom pattern. When double bottom patterns form, it indicates that the strength of the previous downtrend is becoming weak; there are not enough sellers in the market to push the price further down. In short, a double bottom pattern gives a precise idea that the previous downtrend can reverse and a new uptrend can start from that price zone.

What information a trader can get from a double bottom pattern?

A double bottom pattern always indicates a strong bearish reversal. A double bottom pattern can cause short-term or long-term changes in a financial instrument. After mastering this pattern, a trader can identify the potential low of a downtrend. When the price gets rejected in a similar price zone two times, it means there is a change in the market sentiment. Many people are thinking this is the lowest possible price they can get, and they are now buying this asset which is causing the price to get rejected from that zone.

It is not necessary for a double bottom pattern to get rejected from an exact price point. It can be rejected from the same price zone and is still good to go.

Characteristics of a double bottom pattern:

Let’s talk about some characteristics of a double bottom pattern that will help you understand the pattern very well.

A double bottom pattern will have two bottoms of the same width and height. The distance between the two bottoms is generally not too small, and this distance also depends on the timeframe. The distance between two bottoms is relatively minor in a 60-minute chart than in a one-day chart. There will be a neck in the double bottom pattern, which will create the W shape.

Let’s see the picture of this double bottom pattern. There is a running downtrend that is continuously making lower highs and lower lows. After making few lower highs and lower lows, the price will face some resistance and will decline to go further down. Then it will make a corrective move towards the upside. After the corrective move, the price will try to make an impulsive move in its original direction towards the downside. But it will face strong resistance in the price zone near the first bottom, which stops the price from going more down again to continue the downtrend. After the second rejection, the price will make an impulsive move towards the upside, starting the new uptrend.

Sometimes novice traders make the mistake of buying shares just after the price makes the second bottom, but this is not a wise idea because at that point you don’t know yet the level will hold or not. Sometimes price breaks the second bottom level towards the downside, and it will cost you money if you aren’t patient enough to wait for the complete confirmation from the pattern.

The pattern will be confirmed when the price crosses the neckline towards the upside after forming the second bottom.

Look at the yellow arrow near the neckline where price crosses the neckline towards the upside. After crossing this level, you can take your trading decision based on the pattern.

An advance way for the confirmation of the double bottom pattern:

In this section, we will talk about an advanced way for the confirmation of the pattern. Many professional traders wait for another confirmation to be 100% sure of the validity of the pattern. After creating the second bottom, the price crosses the neckline towards the upside, and many times, it again goes down to test the neckline level, known as a retest of the neckline. At the neckline, the price gets rejected again, and finally, the price starts to move upside.

A retest of the neckline gives an extra confluence to traders. This neckline level is vital because it worked as resistance before, and now it is working as a support zone. But it is not obvious for every double bottom pattern to give a neckline retest. So you can wait for the neckline retest, or you can also trade without it.

Double bottom pattern with divergence:

In a strong trend, price and indicator generally move in the same direction, but sometimes you will see indicator is moving in the opposite direction of the price. When prices and indicators move in opposite directions, this is called divergence, which indicates this trend is becoming weak.

At the end of a downtrend, when the double bottom pattern is forming, many times you will find that there is also bullish divergence forming. In that case, two bottoms of the double bottom patterns are making similar low or lower low, but in the indicator section, you will see the second low is forming higher than the first low means indicator is making a higher low. When the double bottom pattern is forming with divergence, it provides extra confluence to the trader. To trade the double top pattern, you need to be 100% sure about the correct formation of the pattern otherwise, it will cost you money in a very quick time.

In the above picture, you can see a double bottom pattern with divergence in action. The indicator used here to identify divergence is the relative strength index (RSI). Here two bottoms are making similar low, so the indicator should do the same. But have a look at the marked box in the indicator window; you can see it is making a higher low which confirms the divergence and indicates the trend’s strength is becoming weak, and it can reverse.

Double bottom with bullish candlestick pattern:

In a double bottom pattern, bullish candles with long wicks in the lower part are seen, which means the price is declining to go down. Bullish candlestick patterns always indicate strong bullish movements in the near future.

Generally, bullish candlestick patterns are found in the orange marked circle. Bullish single candlestick patterns like Hammer, Inverted hammer, Dragonfly Doji, Bullish Spinning are almost always seen in the double bottom pattern. Double candle patterns like Bullish kicker, Bullish engulfing, Piercing Line, Bullish Harami, Tweezer Bottom & Tripple candle patterns like Morning Doji star, Three white soldiers, Bullish engulfing sandwich, Bullish abandoned baby, Morning star, Falling three are also found in the marked zone of the double bottom pattern.

A double bottom pattern in action:

In the picture above, you can see a double bottom pattern formed. Two of the bottoms are rejected from a similar price point. Price was making low at the same level, but in the indicator window, RSI was making a higher low, indicating divergence and probable reversal of the downtrend. When the price crossed the neckline, the pattern was confirmed.

Conclusion:

Identifying double bottom at the right time will always give you an advantage because you can fully use the newly starting trend. Whenever you see a double bottom pattern is forming, you should keep a sharp eye on this asset. If the patterns are completed with all the criteria we talked about here; you can take your trading decision based on this pattern. The number of money traders have to risk while buying shares from the start of an uptrend is significantly lower than other positions. After mastering this pattern, you can identify trend reversal quite well and take good reversal trades.