The Complete Guide to Trading the Double Bottom Pattern

The double bottom pattern is one of the most popular and reliable chart patterns used by technical analysts and traders. This powerful reversal pattern marks the transition from a downtrend to an uptrend, providing a bullish signal to buy.

In this comprehensive guide, we will teach you everything you need to know about the double bottom pattern, how to identify it, and how to effectively trade it.

What is the Double Bottom Pattern?

A double bottom pattern forms after a sustained downtrend when price reaches a support level twice without breaking below it. The two “bottoms” created are roughly equal, forming a W shape.

The pattern completes when price breaks above the resistance level (peak) between the two bottoms. This breakout signals a trend reversal from down to up.

Key Takeaways:

  • Two distinct low points (bottoms) at roughly the same price level
  • Shaped like the letter W
  • Formed during a downtrend as price finds support
  • Completes when price breaks resistance between the bottoms
  • Signals a reversal from downtrend to uptrend

How to Identify the Double Bottom

There are some key characteristics to look for when identifying the double bottom pattern:

  • Two distinct lows – There must be two clear bottoms at roughly the same price level. These lows will form the W shape.
  • Prior downtrend – The double bottom forms during a sustained downtrend as price declines and then finds support.
  • Equal bottoms – The two bottoms do not have to be exactly equal, but should be reasonably close within a few percent.
  • Volume – Volume is usually highest on the first bottom as selling peaks. Selling pressure ease on the second bottom.
  • Breakout – For the pattern to complete, price must break above resistance with increased volume. This confirms the reversal.

Real Example of Double Bottom

Below is an annotated chart of a double bottom pattern on the 1-hour time frame:

[Insert image of double bottom pattern example]

As you can see, a prior downtrend leads into the distinct double bottom formation. On the breakout, volume increases validating the reversal.

How to Trade the Double Bottom Pattern

Now that you know how to spot the double bottom pattern, let’s discuss how to actually trade it:

  • Entry: The entry trigger occurs when price breaks above resistance after the second bottom. Traders will buy at this breakout as it signals an upside breakout.
  • Stop loss: Place a protective stop loss just below the lowest bottom. This will limit losses in case the breakout fails.
  • Take profit: A reasonable take profit is at least equal to the size of the pattern from breakout point to lowest bottom. So if the bottom is $10 below resistance, target at least $10 above the breakout.
  • Trade management: Trail stop below any short term swing highs to lock in profits as the uptrend extends. Monitor for any potential change in momentum.

Double Bottom Trade Example

Here is an annotated chart example of a double bottom trade setup:

[Insert image example of double bottom trade entry, stop, targets]

This shows the exact points where a trader would enter, place stops, and aim for profits.

3 Pros of Trading the Double Bottom Pattern

Trading the double bottom pattern provides traders with an excellent risk vs. reward setup. Here are the main benefits:

  • Defined risk – With a stop clearly placed below the bottom, risk is fixed and limited.
  • Favorable reward – A properly sized take profit target yields a favorable 2:1 or greater risk/reward.
  • High probability – The completed pattern has a high probability of resulting in an upside breakout and trend reversal.

4 Cons of Trading the Double Bottom Pattern

Despite its strengths, the double bottom does have some drawbacks to consider:

  • Subject to false breakout – The breakout may fail resulting in the pattern failing altogether. Stops get traders out for a small loss.
  • Requires patience – Traders must wait for the pattern to fully form and complete which takes time.
  • Potential late entry – Waiting for the breakout signal can result in a late entry compared to the actual bottom.
  • Market conditions – Bearish conditions may cause a failed breakout despite pattern confirmation.

Double Bottom vs Other Bottom Patterns

The double bottom belongs to the larger family of reversal chart patterns known as “bottoms. Here is how it compares:

  • Double bottom – Clear W shape, two sharp bottoms, range bound
  • Rounding bottom – Gradual U shaped curve to bottom, more gradual
  • Head and shoulders bottom – Multiple peaks and valleys, complex structure
  • Cup and handle – Uptrend retracement forming rounded bottom, handle breakout

The double bottom tends to give cleaner and earlier reversal signals compared to these other bottom formations.

How to Combine Other Analysis with Double Bottom Pattern

While the double bottom stands alone as a reliable pattern, savvy traders combine it with other forms of analysis:

  • Volume – Monitor for increasing volume on the breakout for pattern confirmation.
  • Support/resistance – Identify nearby support and resistance levels that add confluence to your analysis.
  • Trendlines – Draw trendlines connecting the two bottoms. The breakout should surpass these downtrend lines.
  • Indicators – Oscillators like RSI or MACD turning higher support the bullish momentum.
  • Candlestick patterns – Bullish candlestick patterns on the breakout provide added confidence.

Using multiple techniques together gives the highest probability of trading success.

Common Questions About the Double Bottom Pattern

Here are answers to some frequently asked questions about the double bottom pattern:

What’s the difference between double bottom and W bottom?

The double bottom and W bottom are essentially the same pattern. Double bottom refers specifically to the reversal pattern, while W bottom describes the shape itself but does not necessarily indicate a reversal.

How far apart can the two bottoms be?

Ideally they are within a few percent of each other. The further apart, the less reliable the pattern becomes. No more than 5-10% at the most.

Does a double bottom work on all time frames?

Yes, the double bottom can be applied on all time frames. Shorter time frames will allow you to enter and exit trades faster but may have more false breakouts.

What happens if price breaks the low of a double bottom?

If price breaks down below the low of the second bottom, it negates the pattern completely. The double bottom is no longer valid. Do not take a trade.

Should I trade every double bottom pattern?

No, it’s important to filter for the highest quality setups. Consider volume, recent momentum, nearby support/resistance levels, and overall market conditions.

Conclusion – A Reliable Reversal Pattern

The double bottom is one of the best chart patterns for trading trend reversals. Its unique W shape structure combined with the key breakout signal gives traders an excellent risk/reward ratio.

Now that you’ve learned how to identify, qualify, and trade the double double bottom pattern, you have an advantage over most novice traders. Be patient in waiting for ideal market conditions to maximize the potential of this high-probability reversal strategy.

Remember to use proper risk management on each trade and combine the double bottom with other confluence factors. Mastering this one pattern can significantly improve your ability to profit from shifts in momentum.

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