The double bottom or W pattern is the most prevalent chart pattern used in trading. In fact, this pattern is so common that it may be taken as irrefutable evidence by itself that price action is not as totally random as many say. The double bottom pattern is one of the very few that perfectly depicts the market’s direction changing. At the bottom of a downtrend, the double bottom forms itself, offering potential long entries for buyers.
What Is A Double Bottom (W Pattern)?
The double bottom pattern is a technical pattern that can be used to identify a likely reversal in the Forex market. The double bottom emerges after an extended move down and can be utilized to discover purchasing opportunities on the way up. Because of the two-touched low and the change in trend direction from downtrend to uptrend, the pattern resembles the letter “W.”
Structure of the Double Bottom Pattern
The double bottom happens when a downturn comes to an end. As the price action swings lower, printing lower highs and lower lows, the price rises before falling back to retest the prior low.
Due to the fundamental principle of technical analysis, which states that the twice-touched low turns into a support level, sellers are unable to print a new bottom below the previous low, giving buyers the chance to drive the price higher. As a result, we have two bottoms that resemble the letter “W” or low points.
On the other hand, the pattern is thought to have started at the peak of the rebound that came after the initial bottom. The “neckline” is a horizontal line that is drawn at the highest point of a rebound.
Given that it’s extremely rare to find two bottoms at the same price, as long as these two lows are close in price, it is seen to be sufficient to confirm a pattern.
The double bottom pattern is regarded as a bullish reversal pattern because it is started by a decline and ends in an uptrend. Once the price action crosses over the neckline, the pattern becomes active. This causes the price action to change from one in which it establishes lower lows and higher highs to one in which it starts a trend of higher lows and higher highs.
In general, it is thought that two bottoms that form quickly after one another can be dangerous since it indicates a very strong decline and the likelihood of the current bearish trend continuing. Due to this, double bottom patterns with a specific interval between two lows are the most successful.
A Double Bottom: What Does It Mean?
According to the majority of technical analysts, the initial bottom should increase by 10 to 20%. Within 3 to 4% points of the previous low, the second bottom should develop, and the volume of the subsequent rally should rise.
A double bottom pattern, like many other chart patterns, is best used to examine a market’s intermediate- to long-term trends. In general, the likelihood that a chart pattern will be effective increases with the distance between the pattern’s two lows. The double bottom pattern’s lows are thought to need to be at least three months long in order for the pattern to have a higher chance of succeeding. Therefore, it is preferable to utilize daily or weekly data price charts while looking for this specific pattern in the markets. Even while the pattern might be visible on intraday price charts, it can be quite challenging to determine whether or not the double bottom pattern is indeed true when using intraday data price charts.
A large or minor downtrend in a particular investment is always followed by a double bottom pattern, which marks the conclusion of the trend and the start of a potential uptrend. As a result, the pattern should be supported by market fundamentals for the security in question as well as for its sector, the market as a whole, and other relevant variables. The fundamentals should depict the traits of an impending market condition reversal. Additionally, it’s important to keep a close eye on the volume as the design takes shape. Typically, the two upward price moves in the pattern are accompanied by an increase in volume. These volume increases provide as additional proof of a successful double bottom pattern and are a clear sign of upward price pressure.
A long position should be taken at the price level of the high of the first rebound, with a stop loss at the second low in the pattern, once the closing price is in the second rebound and is getting close to the high of the first rebound of the pattern, and a noticeable increase in volume recently, and the fundamentals point to market conditions that favor a reversal. At double the stop loss amount above the entry price, a profit objective should be set.
How Can You Trade A Double Bottom?
Let’s use the price graph below as an illustration of a double bottom trade. As it demonstrates, the market was losing value prior to the double bottom formation, which was associated with a negative trend. The first low in this pattern marks where the downward momentum pauses and retraces to the neckline.
If the momentum had risen farther at this time, the pattern would have been void. Instead, before the initial low, it bounced off the neckline and returned to the general negative trend. Eventually, that momentum ceased, and the second low was created. Here, the trend underwent a more significant reversal and continued upward through the neckline’s level of resistance.
A trader would attempt to start a long position at the second low in order to profit from this pattern. At the first indication of the trend reversing, they would probably sell their long positions, at which point the trend would turn bearish once more.
Double Bottom Pullback
Sometimes the price will draw back to within a few cents of the breakout point after a double bottom has formed and the price has risen above it. There are at least two benefits to being aware of this possibility:
- People who are holding long positions are aware that this could happen, so they can decide whether to exit or wait it out in the hopes that the price would rise once more.
- For those who have not yet established a long position but are seeking for an entry point, the pullback offers another one.
Double bottom pullbacks are frequent and might be different. The breakout point is occasionally reached by the retreat, occasionally it is passed by it, and other times it is not. On the price chart for the AUD/USD, the small double bottom pullback seen below is an example.
The price is heading lower and forming a double bottom pattern, which is finished by an upside breakout, as you can see from the graph. As soon as the price reaches the breakout mark, it begins to move higher. As a general rule, waiting for the price to resume going higher after the retreat won’t always result in profits, but at least the price has given some indication that it is no longer falling.
Strengths and Weaknesses of the Double Bottom Pattern
One of the most potent reversal patterns is the double bottom pattern. It’s not a typical pattern because it has two bottoms. However, once recognized, the pattern is quite good in foretelling changes in trend direction.
Its biggest strength is the availability of precisely defined levels to play against. When the pattern is engaged, the neckline identifies the risk and aids in calculating the take profit. It is crucial to draw the double bottom correctly for this reason.
The double bottom pattern’s main drawback is that it is a contrarian tactic. Remember that we are playing the “long” trade here and that the general trend is negative. As a result, there is always a chance that the market will keep going in the same direction. Therefore, before entering the market, it is crucial to check supporting variables in the context of other technical indicators.
Example of Double Bottom Pattern
As was already said, it is crucial to recognize and draw the double bottom pattern. Below is a USD/CAD hourly chart showing how the pair initially declined before attempting to break through the horizontal support and intensify the bearish scenario.
The bulls, however, were able to hold off and eventually break over the neckline, erasing all prior losses and recording gains. Around the $1.30 handle, we find two lows that are nearly at the same price. On the other side, the price action also produced two almost identical highs during a comeback; as a result, we took use of this opportunity to construct the neckline, or resistance line, that connects these two highs.
It is also important to note that many traders make the critical error of initiating the “buy” trade before the pattern has been activated. No matter how flawless it appears, a double bottom pattern is not active until the buyers break the neck line and get a close above it.
Double Bottom Pattern Trading Example
The same example will be used again to demonstrate how to trade the double bottom pattern. This example also sheds a lot of light on how failed breakouts function. As shown in the chart below, the price action immediately accelerated higher after forming a second bottom, surpassing the areas where the prior two highs were registered.
However, as the price soon dropped back below the neckline, this was revealed to be an unsuccessful breakout. This is an excellent illustration of how crucial the virtue of patience is in trading. Additionally, this demonstrates the need of waiting for a close above the neckline before making a market entry.
In order to punish the buyers for failing to complete the first move higher, the failed breakouts are typically followed by a rapid move lower. This is precisely what took place. To overcome the neckline near the $1.31 level, the buyers ultimately gathered at lower prices and began another powerful upward drive.
As a result, we entered the market at $1.3110, where the USD/CAD initially closed above the neckline. In order to simulate a failed breakout, where price action quickly breaks through support or resistance without a follow-up, the stop-loss should be set below the neckline.
Your risk tolerance will determine the precise stop-loss level, which can be somewhere between 15 and 30 pip below the neckline. The triggered double bottom design is invalidated by any movement or proximity below the neckline.
Similar to the head and shoulders pattern, the take profit is determined by calculating the separation between the neckline and the supporting trend line (double bottoms). The same trend line is then copied and pasted from the breakout point, with one of the trend line’s ends serving as our take-profit point. The trend line in our situation finishes at $1.3180.
A few days later, our take profit order is finally fulfilled, netting us over 70 pip. We earned 70 pips while risking 15/30 pips, which is a wonderful risk-reward ratio depending on your risk tolerance and stop loss position.
Methods for Selecting Potential Targets for Double Bottom Patterns
Any possible target should first and foremost be located utilizing basic support and resistance levels. Regardless of the price action pattern that has developed, this is true.
However, when trading a double bottom pattern, there is a way to pinpoint a likely target. The term “measured move” or “measured move objective” describes it, and the idea is straightforward.
Simply measure the distance between the two bottoms and the neckline, then extrapolate that distance to a higher, future level in the market to get the measured move objective for a double bottom pattern.
Using the NZD/USD example, let’s examine how we would measure this target.
The double bottom and neckline are separated in the above chart by 170 pip. In order to find our measured objective, we would measure an extra 170 pip above the neckline.
A final remark on the measured move on this chart. Zooming out reveals that the measured target really corresponds to a previous market level. This would increase our faith in the accuracy of the objective.
Take note of how closely our measured objective (170 pip) from the double bottom low matches a previous market support level.
Double Bottom Pattern Trading: Advantages and Disadvantages
The Advantages of Using Double Bottom Patterns in Trading
The fact that traders can identify double bottom patterns in all time frames is one of their benefits. Consequently, it can be used by a variety of traders.
While traders who prefer to hold positions for extended periods look for one-hour or four-hour time frames, such as long periods of one day, one week, or even one month. Traders who dislike holding positions for extended periods look for shorter time frames, such as 15-minute or 5-minute time frames, or even one-minute time frames.
The ability of traders to identify double top and double bottom patterns on a variety of currency, commodity, and stock market charts is another benefit.
The double-bottom patterns have been studied and traded throughout the years since the market repeats itself over time.
The Disadvantages of Using Double Bottom Patterns in Trading
One of the things that enrages traders is a fake breakout.
The neckline, or support level, has been breached in the graph below, and the price has since reclaimed the top. Traders should place their stop loss there.
How to trade the Double Bottom Pattern and Profit From “trapped” traders: The False Break
The duration and distance between the lows are important factors to consider while trading the Double Bottom; the wider the “gap,” the better. Because more traders become interested when the lows are spread apart, the price may rise as a result.
With this idea, you can leverage “trapped” traders to your advantage. This is how:
- There should be time and space between the first and second lows.
- Allow the price to drop below the initial low.
- Wait for the market to reject lower prices before buying.
The concept is straightforward. Bearish traders will short the markets as soon as the price breaks below the first low and will set their stops above the lows. But the short traders are “stuck” if the price moves swiftly higher. And you can profit from it by going long, expecting that if the price rises, their stops will be triggered and tip the market in your favor.
Utilizing the Double Bottom Breakout Technique
After the Double Bottom is formed, you shouldn’t “chase” a breakout because the price is likely to reverse downward. Instead, prior to buying a breakout, you want to see strength from the buyers. This is how:
- Find a possible Double Bottom
- Let the price rise above the prior swing high.
- Watch for a weak pullback to develop (a series of small range candles)
- Buy once the swing high is broken.
This method is effective for two reasons.
- Increased likelihood for profitable trading setup You’re not catching a knife that’s falling. Instead, you allow the price to rise above the swing high to demonstrate the strength of the buyers.
- A good risk to reward ratio. A weak pullback indicates that there isn’t much selling pressure. Additionally, if you want a higher risk-reward ratio, you can place your stop loss below the swing low.
The last thing you want to do is “chasing” the market if there is a big breakout in the price. Since you lack a rational stop loss location, you risk getting stopped out on a pullback or reversal. What can you do, then? You watch for the breakout level to be retested. This is how:
- Wait for a retest of the prior Resistance turned Support if the price suddenly breaks out.
- Wait for a bullish reversal candlestick pattern to appear if there is a retest.
- If a bullish reversal candlestick pattern is present, buy with stops at 1 ATR below the low on the following candle.
How To Accurately Identify Double Bottom Reversals
There are different types of Double Bottom. Two identical Double Bottom patterns are possible, but one is more likely to reverse while the other is more likely to fail. So, how do you search for the pattern with a high probability? Multiple time frames can be used to verify your setup. This is how it goes:
- Choose a longer time period. area of support
- Look for a Double Bottom pattern on a lower time frame that leans against the higher time frame support.
Here is one example. The price is at the Support area on the longer time frame.
You get a Double Bottom pattern on the lower time frame.
When you combine this various time frame analysis with the entrance strategies you already learned, you’ll see a significant improvement in your reversal trade performance.
Conclusion
Let’s review what we’ve learned about double bottom patterns because we’ve covered a lot of ground in this tutorial.
The double bottom is a reversal pattern that happens after a prolonged downward swing. The pattern indicates that the market is unable to break through a critical support level and will thus likely rise. To trade double bottoms, you can employ various time frames.
A double bottom pattern has these three essential features:
- First bottom
- Second bottom
- Neckline
The neckline is a degree of resistance that develops after the initial bottom. The double bottom pattern is confirmed by a daily close above the neckline. Wait for a new support test after the market closes back above the neckline. This retest indicates a chance to enter long.
A possible target can be found using a measured objective. It can be discovered by measuring the distance between the neckline and the double bottom support level, then extending that measurement past the neckline to a later, higher level in the market.
The False Break method can be used to make money off of “trapped” traders. Wait for a buildup to form at the neckline before trading the Double Bottom Breakout to get a good risk/reward ratio. To increase the precision of your reversal trades, consider several time frames.