Double Bottom Chart Pattern
Before we discuss this pattern, we should be familiar with “Double Top, Support and resistance.”
The double bottom chart pattern can be termed as “reversal pattern” which occurs after a downtrend. It is inverse to the double top. This pattern will suggest us of “buying opportunities.”
How do we identify the double bottom pattern?
There are two lows, where the price attempted to break through a support level twice before reversing to the upside. There is also a neckline, which is considered the top part of the pattern.
The illustration chart below shows the model of a double bottom pattern.
Number-1 First low
number-2 Second low
When sellers attempt to breach a support level twice, a double bottom is formed. In the illustration, we can note that:
Number -1: Buyers enter the market at a support level and prevent the sellers from pushing the price down lower.
Number-2: The sellers retreat and the buyers gain the momentum to rally the price back up after a second failed attempt at making new lows.
Exercise 1: Identify the double bottom pattern Show exercise
Exercise 2: Identify the double bottom pattern Show exercise
Technique 1: Trading the double bottom:
Enter a long position once the price breaks through the neckline of the pattern. The illustration chart below indicates “As the price moves up – The neckline (grey line) is being broken.”
number_1 First low
number_2 Second low
EL1 Entry when the price breaks through the neckline.
SL2 Stop loss goes below the pattern.
TP3 Profit target goes the same distance as the height of the pattern, up from the neckline.
The “Stop loss” is placed just below the lows of the double bottom pattern and the “Profit target” is measured by taking the height of the actual pattern and extending that distance up from the neckline.
Practice where to place the entry, stop loss and take profit according to Technique 1 in the following exercises:
Exercise 1: Where to place your entry, stop loss and profit target Show exercise
Technique 2: Trading the double bottom
“Wait” for the price to trade above the neckline (broken resistance) and then look to place a buy order on the retest of the neckline as support (broken resistance now becomes support). The stop loss would go below the new support area and the profit target would remain the same as in the first illustration).
The chart below demonstrates the second way a trader can trade the double bottom pattern showing the entry (blue), stop loss (red) and take profit levels (green):
number_1 First low
number_2 Second low
number_4 Height of the pattern (red shaded area)
number_5 Same distance as the height of the pattern (red shaded area)
EL1 Long entry after the price retests the neckline as support (in the red shaded area)
SL2 Stop loss goes below the new support level
TP3 Profit target goes the same distance as the height of the pattern, up from the neckline
You can practice where to place entry, exit and take profit according to method 2 in the following exercises:
Exercise 1: Where to place your entry, stop loss and profit target. Show exercise.
An overview of the lesson discussed so far:
Buying opportunities: The double bottom chart pattern indicates a possible move up in price and potential.
There are two techniques that can be adopted to trade the double bottom.
Trade the pattern: On the breakout of the neckline, place the “stop loss” below the pattern and the “profit target” the same height as the pattern, up from the neckline.
Another technique that can be adopted to trade: After the price has broken through the neckline and retested it as support. The stop loss goes below the support level and the profit target goes the same distance as the height of the pattern, up from the neckline.