3.8 Double Bottom Pattern
A double bottom pattern usually forms after a sustained downtrend and is a reliable reversal signal. It looks like a ‘W’ and is made up of two distinctive troughs around the same price level. Please note that while a double bottom indicates the possibilities of a reversal of a downtrend, it may just end as a consolidation or correction.
Formation of a Double Bottom
As clear from the above drawing, a double bottom pattern is formed by prices falling to a support area, bouncing back, falling again to the support zone and then rising past the earlier peak.
Two valleys are thus formed, giving the pattern its name. A line drawn through the peak between the two troughs is called the ‘neckline’ or the confirmation point. The pattern is said to be confirmed if the price rises past this point.
The bears were unable to take out the earlier bottom and lost control to the bulls that were waiting to pounce in the support zone. The bulls took matters over and set up a rally to pass the resistance of the previous peak, resulting in a complete reversal of the downtrend.
How to Trade Double-Bottom Pattern?
Trading with double bottoms is exactly same as with double tops. The only difference is that instead of a short-selling position you will go for buying when a double bottom pattern emerges on your Forex chart.
Trade the pattern by placing a buy order just above the confirmation point and expect prices to rise by the same height as that of the double bottom formation below it.
Please note that many times there will be some pull-back after the price breaks above the neckline and hence it may be a good idea to wait for some time to enter a long position at slightly lower price.
- Trading with Double-Bottom Chart Pattern