A double bottom pattern is a bullish pattern. It consists of two support levels or valleys. The price increases quickly or gradually after the first support level is formed. After that, the price returns to the first support level, which holds, thus creating the double bottom. Look for the price to hold support areas and rise to confirm a bullish reversal.
What Is a Double Bottom Pattern?
A double bottom pattern consists of several candlesticks that form two valleys or support levels, which are either equal or nearly equal in height. Typically, when the second peak forms, it cannot break above the first peak, causing a double top failure. They are common patterns that can be found on any chart.
Double bottoms are a strong bullish reversal pattern. It gets its name from the shape it forms. Sometimes, double bottoms are referred to as W patterns. Look closely to notice that it has two troughs and a peak.
Double bottom patterns describe a stock drop, followed by a rebound, and then another drop to the same support level. This gives it the W look.
This is an example of a double bottom pattern. Traders would enter a long position on the bullish candlestick that breaks above the top of the double bottom. A stop loss would be placed below the second bottom or the bearish candlestick in the picture.
Double Bottom Basics
Thus, the twice-touched low is now seen as a key level of support. They can be found in any chart’s time frame. As with most chart patterns, these work best when viewed over a longer time frame.
Many potential double bottoms can form and then break down along the way. Unless key resistance is broken, the reversal cannot be confirmed. Sometimes, this is a moving average, an angular resistance, or a technical indicator.
As with any reversal pattern, a strong trend must be in place to reverse. In this case, the double bottom is a bullish reversal pattern; therefore, it must be in a downtrend.
The Technicals
The first trough forms at the lowest point of the current trend. That is why having a strong trend in place is important for this pattern, and it is happening at the bottom of the trend, hence the name and the lows.
The first low should be at least as low as the previous lows. This way, it does not raise a red flag among traders.
After the first low forms, a correction takes place. The bulls are increasing buying pressure and volume to drive the price higher, despite the bears still being in control.
Sometimes, the peak’s height can be rounded or drawn out instead of that sharp move up. The round high is hesitant to go back down.
This hesitation shows that demand for the stock is increasing. Traders are becoming increasingly interested in it; however, it must still be stronger for the breakout to occur.
The Second Trough
The second trough of the double bottom is formed when the price declines after the reaction high has been reached. This typically occurs with low volume and returns to the support level established by the previous low.
Next, the bears return, not yet ready to relinquish control of the trend. They test support to see if it will hold.
Notably, exact troughs on double bottom patterns are ideal; if it is not exact, it must be close to exact. It is important to remember that not every trend will be picture-perfect.
The essence of the pattern is more important than the textbook look. Patterns on real-world charts take on different shapes.
Volume and Resistance Break
Volume is more important on double bottom patterns than on double-top patterns. There needs to be clear evidence of increasing volume and buying pressure. Sometimes, gap-up patterns form, indicating that a change in trend is imminent.
As the price moves back up, it is heading to test resistance. The highest levels of the troughs form resistance. The price needs to break resistance and hold for the double bottom pattern to be complete, allowing the reversal to begin.
Support and resistance are crucial aspects of trading; these are levels that traders pay special attention to. Once resistance is broken and holds, it becomes a new support level.
The price may then head down to test this new support level and confirm its validity. This can offer a second chance to close a short position or go long.
Double Bottom Pattern Trading Strategy
- Watch for the fall of the 1st valley.
- Next, watch for the price to move up either quickly or slowly.
- Then, watch for price action to fall again to the previous valley area.
- Watch if the price can break down below the previous support level.
- Traders take a long position once the price breaks above the neckline of the two valleys.
- Place a stop at the bottom of the 2nd valley.
- Some traders take a long position once the 2nd valley holds support near the 1st peak.
- Place a stop below the 2nd valley.
Double Bottom Pattern Example
This is an example of a double bottom pattern on the daily chart of $BYND. This took place at the bottom of a falling wedge pattern. The breakout created the handle of a cup and handle pattern. Then, it ultimately formed a rising wedge pattern.
5 Minute Example
The chart example above shows a double bottom pattern intraday with a nice symmetrical triangle breakout. Notice the bullish candlestick that broke out of the triangle’s apex point. That would have been the entry point for a long position. As the price broke the apex area, it formed a rising wedge pattern near premarket highs.
At the top of the wedge, it couldn’t break the high at the open or premarket high. While it looked like a cup and handle formation, it ended up creating a double top failure. So, it had a double bottom breakout and then a failure at resistance. When the price failed, it ended up creating a falling wedge pattern.
Double Bottom Pattern Failure
This is an example of a double bottom failure inside a falling channel. The large falling channel resembles a big bull flag, but it’s not because it never broke out. You’ll see that the double bottom formation tried to break out, but it was a fakeout.
A small spinning top formed as the price was at angular resistance. The pattern turned into a bearish harami pattern, and the double top never broke out, and price action continued the bearish trend into the aftermarket. You’ll notice a brief rally at the close of the market that returned to the double bottom failure area.
Inverse Head and Shoulders Failure
The chart example above illustrates a double bottom within an inverse head and shoulders or triple bottom pattern. It’s essential to recognize that double bottom patterns can sometimes form within larger patterns. This pattern formed part of a larger falling wedge pattern.
Time frames play a big factor in double-bottom patterns, especially during power hour. This pattern failed near the end of the day, at the point of angular resistance, and resulted in a falling wedge breakout in the aftermarket.
Double Bottom Pattern Stages
Point 1: The First Bottom
The first bottom represents the lowest point of the bearish trend. During this stage, you will not know that a double bottom is forming. This is because the new lower close aligns with the current bearish trend. Generally, the market sentiment is negative, even though the security is very oversold. Be cautious of this, as it leaves room for positive upswings. This brings us to the next part of the double-bottom pattern.
Point 2: The Trough
With an oversold security (point 1), the market rebounds to point 2, the trough. This bounce recovered some of the losses from the first bottom. As you can see, the trough acts as a point of overhead resistance.
Now, the security is overbought and hits overhead resistance at the trough. The buyers need to be stronger to push through the trough.
Point 3: The Second Bottom
Most people think the bearish trend will continue as the security cannot break through the trough. Sure enough, this assumption holds. The market reverses and reaches the previous low at point 1, the first bottom.
Suddenly, however, the market stops and reverses around the same price as the previous bottom, point 1. This tells us that the first bottom is now acting as support. In other words, the buyers have returned and are gaining strength. This is a good sign!
Point 4: The Upturn
Buyers have confidence, and the market reflects this strength with the upturn at point 4. Buyers’ pressure is increasing, driving the market and prices upwards.
Point 5: The Breakout
The final part we have been waiting for is confirmation of the double bottom pattern. Confirmation happens when buyers break through the trough or overhead resistance at point 2. The trough has now become a support as the bulls are in charge. This is where we enter our trade!
Final Thoughts on Double Bottom Patterns
Double bottom patterns usually take longer to form than their counterpart. Patience can be a virtue when trading this pattern. As with any pattern, confirmation of the breakout is paramount. The pattern is not complete until the previous reaction high is taken out. As always, wait for confirmation and use the tools to make the best trade available. Do not get discouraged if the stock does not go according to plan; those things happen. The best approach is to identify where and how the plan failed and look for the next possible setup. Use proper risk management techniques when trading a double bottom pattern.
Frequently Asked Questions
A double bottom pattern is a bullish pattern. It forms a 'W' pattern and signals a bullish breakout once the price breaks the neckline of the 'W'.
The double bottom pattern is a reversal pattern that signals a bullish breakout is imminent. It shows two distinct equal bottoms, which means support is holding. Traders look to enter a long position as the price breaks above the top of the resistance.
The success rate of a double bottom pattern is 78.55% if the setup is solid. Patterns fail at times, so it's important to have risk management strategies in place.
