What Are Double Bottom Patterns and How to Trade Them?
Double bottom patterns are a bullish pattern. It consists of two valleys or support levels. After the first support level is formed, price goes up either quickly or gradually. After that, price moves back down to the first support level and it holds that first support level, thus creating the double bottom. Look for price to hold support areas and rise to confirm bullish continuation. Watch our video on how to identify and trade double bottom patterns.
What Is a Double Bottom Pattern & How to Identify These Patterns?
A double bottom pattern consists of several candlesticks that form two valleys or support levels that are either equal or near equal height. Typically when the 2nd peak forms, it can’t break above the first peak and causes 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 it’s name because of the shape it forms. Also, sometimes double bottoms are referred to as W patterns. Watch our video above to learn more about double bottoms.Double bottom patterns are common patterns that can be found on any chart. Double bottoms are a bullish reversal pattern. It gets its name because of the shape it forms.
Also, the double bottom is shaped like a W. If you look closely, you’ll notice it has a 2 troughs and a peak. The stock market shows the fight between buyers and sellers. The buyers and sellers are known as bulls and bears.
Japanese candlesticks patterns are made up of the reactions of these two kinds of players. Not only do these patterns form by candlesticks but each candlestick tells you a story. It’s important to know what candlesticks mean when trading stocks.
Patterns break down all the time and candlesticks will give you a warning signs ahead of time whether it’s high wave candlesticks, inverted hammer candlesticks or hanging man candlesticks (make sure to bookmark our stock watchlists page that we update daily).
Basics of Double Bottom Patterns
Double bottom patterns describe the drop of a stock, followed by a rebound, then another drop to the same support level. This gives it the W look.
Thus, the twice touched low is now seen as a key level of support by traders. Double bottoms can be found on any chart time frame. But as with most chart patterns, these work the best over a longer view of time.
Many potential double bottoms can form and then breakdown along the way. Unless key resistance is broken, the reversal can’t be confirmed. Sometimes this is a moving average, an angular resistance or another time frame candlestick. To get the best technical analysis tool on the planet for trend lines, moving averages and dynamic alerts, check out trendspider.
As with any reversal pattern there has to be a strong trend in place to reverse. In this case, the double bottom is a bullish reversal pattern so it must be in a downtrend.
If you’re looking to do swing trading strategies for beginners the daily charts are great for this because the trend is strong and the reversal is more significant. We teach how to trade candlesticks on our live daily streams. Check out our trading service to learn more.
Technicals of Double Bottom Patterns
The first trough forms at the lowest point of the current trend. That’s why having a strong trend in place is important for this pattern.
This pattern is happening at the bottom of the trend. Hence the name and the lows.
The first low shouldn’t be too much lower than previous lows. This way it doesn’t raise a red flag among traders. The downtrend isn’t in trouble yet. That comes later.
After you get your first low, a correction takes place. This is the bulls coming in to drive price up. The bears are still in control at this point though.
Sometimes the high of the peak can be round or drawn out a bit instead of that sharp move up. The round high is hesitation to go back down.
This hesitation tells you that demand for the stock is increasing. Traders are becoming more interested in it. It’s still not strong enough for the breakout though.
The Second Trough
The second trough of the double bottom is formed when price declines after the reaction high. This usually occurs with low volume and goes back to the support level created by the previous low.
Next, the bears come back in not ready to give up control of the trend yet. They test support to see if it’ll hold.
Notably, exact troughs on double bottom patterns are ideal but there is room to maneuver. If it’s not exact it needs to be pretty close. It’s important to remember that not every trend will be picture perfect and that’s OK.
The essence of the pattern is more important than the text book look. Patterns on real world charts don’t shape up perfectly.
How to Trade Double Bottom Patterns
- How to trade double bottom patterns:
- Watch for fall of 1st valley
- Next, watch for price to move up either quickly or slowly
- Then, watch for price action to fall again to the previous valley area
- Watch if price can break down below previous support level
- Traders take a long once price breaks above the neckline of the two valleys
- Place stop at bottom of the 2nd valley
- Some traders take a long position once 2nd valley holds support near 1st peak
- Place stop below the 2nd valley
Volume and Resistance Break
Volume is more important on double bottom patterns than double top patterns. There needs to be clear evidence of volume and buying pressure increasing. Sometimes gap up patterns form indicating a change in trend is about to happen.
As price moves back up, it’s heading to test resistance. Resistance is formed by the highest levels of the troughs. In order for the double bottom pattern to be complete and begin the reversal, price needs to break resistance and hold.
Support and resistance are such an important part of trading. It’s levels that traders pay special attention to as well as obey. Once resistance is broken and holds, it becomes new support levels.
Price may then head back down to test this new support level to confirm the validity of it. This can offer a second chance to close a short position or go long.
The Bottom Line
Double bottom patterns usually take longer to form than its counterpart. Patience can be a virtue when trading this pattern. As with any pattern confirmation of the breakout is paramount. The pattern isn’t complete until the previous reaction high is taken out. Take our free online trading courses.